Cryptocurrency Regulation in Sri Lanka Prior to 2024

Sri Lanka, navigating its economic recovery from the global pandemic, explored the potential of cryptocurrency and blockchain technology as a means to strengthen its economy. The country’s stance towards cryptocurrency regulation before 2024 presents a blend of caution, interest in innovation, and the pursuit of a regulatory framework suited to its economic context.

Central Bank’s Stance and Business Adaptation

The Central Bank of Sri Lanka (CBSL) had a cautious stance towards cryptocurrencies. The Governor, Ajith Nivard Cabraal, emphasized that the only recognized currency unit by the Central Bank was the rupee, and that cryptocurrencies like Bitcoin, although not illegal, were not officially approved. Despite this stance, businesses in Sri Lanka began accepting Bitcoin, and platforms like GemPay emerged as cryptocurrency payment gateways. This development highlighted a gap between official policy and market realities, with the Central Bank issuing warnings about the risks of crypto investments and the lack of legal or regulatory recourse​​.

Development of Regulatory Framework

The Sri Lankan government recognized the need for a regulatory framework to manage the growing interest in digital currencies and blockchain technology. A committee was formed to study the regulatory frameworks of other countries and propose a suitable framework for Sri Lanka. This committee’s mandate included understanding international approaches to blockchain and cryptocurrency, particularly focusing on anti-money laundering, terrorism financing, and Know Your Customer processes. The intention was to align with global standards while fostering investment in digital banking and blockchain industries​​.

CBSL’s Blockchain Initiatives

The CBSL showed interest in supporting digital currencies, despite the challenges presented by low internet usage and limited public knowledge about cryptocurrencies in Sri Lanka. In response, the CBSL planned to develop a blockchain-based Know Your Customer (KYC) platform. This initiative was part of a broader strategy to advance Sri Lanka’s financial sector using digital technologies. The KYC platform aimed to increase efficiency and financial inclusion by allowing commercial banks and the government to share and update customer data on the blockchain​​.

Blockchain in Agriculture

In an innovative move, the Sri Lankan state, in partnership with Oxfam and Aon, worked to create a blockchain-based insurance platform to support the agriculture sector. This project aimed to provide affordable insurance to small rice farmers through decentralized insurance apps, highlighting the potential of blockchain technology in sectors beyond finance​​.

Challenges and Potential Solutions

The main challenge in regulating cryptocurrencies in Sri Lanka was the government’s inability to tax transactions effectively. Cryptocurrencies, operating on a decentralized system, posed a challenge to traditional taxation and regulatory mechanisms. However, viable solutions were proposed, such as requiring cryptocurrency payments to be processed by a payment processor that converts cryptocurrencies into Sri Lankan Rupees, ensuring taxable transactions. Additionally, to manage risks associated with overseas and decentralized exchanges, measures like requiring foreign exchanges to register locally and establishing a blockchain analytics department at the Central Bank were suggested​​​​​​.

Conclusion

Prior to 2024, Sri Lanka’s approach to cryptocurrency regulation was marked by a cautious yet open-minded stance. The country’s central bank and government recognized the potential of digital currencies and blockchain technology to bolster the economy, particularly in the aftermath of the pandemic. The development of a regulatory framework, exploration of blockchain applications beyond finance, and the proposal of innovative solutions to regulatory challenges reflected a nuanced understanding of the opportunities and risks presented by cryptocurrencies.