How Sri Lanka’s economy can implement cryptocurrency and blockchain regulations

Bitcoin is the world’s first cryptocurrency and was developed in the wake of the 2008 economic crisis as a measure of protection against global economic crises in the future

By Don Jayamaha Jr.

Global economic crisis

Sri Lanka’s road to recovery from the global pandemic and economic crisis has opened up the doors of cryptocurrency and blockchain as a viable solution to strengthen its economy. 

Sri Lanka has lost over $ 400 million of annual income from the tourism industry and $ 1.3 billion annual income from overseas employment. The global pandemic has caused the entire global economy to come to the brink of collapse with Sri Lanka included.

Bitcoin is the world’s first cryptocurrency and was developed in the wake of the 2008 economic crisis as a measure of protection against global economic crises in the future. Since its development, bitcoin has had many ups and downs to test its resilience in the market. As time passed, it has been able to overcome all previous setbacks, but this current economic crisis gave bitcoin an opportunity to test itself in the very situation it was designed to protect against, global economic crises. 

During this past year, bitcoin has not only been able to serve as a financial vehicle of protection during economic downturn, but it has been able to hit record high of over $ 63,000 per bitcoin growing to over three times its previous high during 2017 of $ 20,000. This has proved the viability of bitcoin and other cryptocurrencies, pushing Sri Lanka to come to a plan of adoption to protect its economy from future economic crisis and strengthening its overall economy.

Cryptocurrency and blockchain benefits

The benefit of cryptocurrencies and blockchain technology is that they are borderless, decentralised, secure, and transparent. These qualities ensure the technology is safe to use since no one country has control over the systems. Transparency and security make them efficient at setting up systems to protect against money laundering, terrorist financing, and other criminal activities. As Sri Lanka is an international tourist destination, having the ability to accept cryptocurrency payments makes it a more attractive destination of choice.

Sri Lanka can benefit from this as the technology is relatively new, giving Sri Lanka the opportunity to attract overseas investments to set it up as a cryptocurrency and blockchain progressive investment location, such as Singapore, UAE, Hong Kong, United Kingdom, European Union and USA. 

Cryptocurrency and blockchain industry can be divided into several areas of investments:

I. Blockchain development

II. Cryptocurrency tokenomics

III. Cryptocurrency exchanges

IV. Cryptocurrency mining

V. Decentralised finance (De-Fi)

VI. Cryptocurrency payment processor

Risk of opening cryptocurrency markets 

The main risk of opening the cryptocurrency markets in Sri Lanka is the Government’s inability to tax these types of transactions. Cryptocurrency is built on a decentralised system that the Government is not able to control, thereby may hinder Sri Lanka’s ability to profit off of the business transactions caused by the reduction in taxes it could have potentially collected. 

As an example, Bali banned the acceptance of cryptocurrency payments in 2018 as it realised a reduction in transactions from tourists on the island due to the acceptance of cryptocurrency by many of its local businesses. Merchants accepting cryptocurrency reduced the revenue into the island as these transactions existed outside the traditional banking system. However, this also had a negative effect on tourism as it deterred cryptocurrency holders from visiting Bali.

The trading of cryptocurrency on centralised exchanges has relatively low risk to the economy as their data and KYC are known to the exchange and can be requested by the Government through the courts at any time. The risk to governments comes from interaction with overseas exchanges as getting access to their records require the courts of a foreign nation. There is also the risk of decentralised exchanges as be a possible source of money laundering, terrorist financing, and other criminal actives.

The risk can be divided into the following areas:

I. Payments (Taxation)

II. Overseas exchanges (KYC Information Access)

III. Decentralised exchanges (AML, terrorist financing, criminal activity)

Recommendations to overcome the risk

The risks have viable solutions that can allow the opening of cryptocurrency markets in Sri Lanka without causing harm the economy and current structures of the traditional banking system.

I. Payments (Taxation) – The solution for the taxation on cryptocurrency payments would be to require all acceptance of cryptocurrency payments to be done by a cryptocurrency payment processor which converts the cryptocurrency into Sri Lankan Rupees (LKR) and settles the merchants to their bank accounts in LKR. This would ensure the deposit of LKR into merchant’s bank accounts for business transactions, effectively allowing the Government the ability to collect tax on cryptocurrency payments.

II. Overseas exchanges (KYC Information Access) – The solution for being able to regulate the access to KYC information Access in Sri Lanka by exchanges would be to require any exchange with Sri Lanka customers to register a local company in Sri Lanka for operations with the Sri Lankan market. This would ensure that the Government has access to KYC Information if need be, by the Sri Lanka courts.

III. Decentralised Exchanges (AML, Terrorist Financing, Criminal Activity) – The best way to combat these kinds of transactions would be for the Central Bank to setup a blockchain analytics department. This department can take charge of observing the different blockchain with any suspicious activities by cross referencing known terrorists’ addresses with addresses of people in Sri Lanka.