“Banning cryptocurrency is perhaps the most advisable choice open to India,” the Reserve Bank of India’s Deputy Governor T Rabi Sankar said in a keynote address delivered at the Indian Banks Association’s 17th Annual Banking Technology Conference and Awards. He added that cryptocurrencies cannot be defined as a currency, asset, or commodity and carries no underlying cash flows or intrinsic value.
“We have examined the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny,” he clarified and concluded that they are akin to Ponzi schemes.
He also pointed out that cryptocurrencies’ “impressive returns” do not prove anything as even tulips offered staggering returns in the 17th century, in reference to the Tulip mania. “Cryptocurrencies are very much like a speculative or a gambling contract,” T Rabi Sankar added.
T Rabi Shankar’s stinging assessment of cryptocurrencies indicates that the RBI continues to have a conservative stance over cryptocurrencies. His comments are a sobering reminder of the issues which plague crypto regulations in India.
Key Takeaways from T Rabi Sankar’s speech
Will wreck the currency system: Rabi Sankar was of the opinion that cryptocurrencies will wreck the currency system, the monetary authority, the banking system, and the government’s ability to control the economy. “They threaten the financial sovereignty of a country and make it susceptible to strategic manipulation by private corporates creating these currencies or governments that control them,” he said in his address.
Undermines financial integrity: “We have seen that crypto-technology is underpinned by a philosophy to evade government controls,” Sankar said. He explained that cryptocurrencies have been developed specifically to bypass the regulated financial system. “Additionally, they undermine financial integrity, especially the KYC regime and AML/CFT regulations and at least potentially facilitate anti-social activities,” he cautioned.
Characterised by hyperbole: The deputy governor cited an article in the NYT which likened Bitcoin to a digital gold rush. He stated: “Indeed, hyperbole continues to characterise all aspects of the crypto world. Crypto messaging does not appear to be directed at the rational or sensible. It would serve us well if the understanding about cryptocurrencies goes beyond the hype and gets rooted in reason and pragmatism.”
T Rabi Sankar’s assessment of cryptocurrencies
In his introduction, the deputy governor said that the basic purpose of blockchain technology, or more generally the distributed ledger, is to make financial intermediation, and therefore banks, redundant.
Should India ban cryptocurrencies?
T Rabi Sankar responded to the argument against banning cryptocurrencies because advanced economies (AEs) are not resorting to bans. He advised that India is not placed in the same place as AEs. “We should be alert to the possibility that private currencies can be used for global strategic control,” he noted.
- No loss of wealth for Indians invested in cryptocurrencies: He rejected the idea that banning cryptocurrencies would lead to a loss of wealth for investors. A ban would not result in a loss because investors can be provided with a “reasonable exit”. He also said that people are fully aware of the risks involved with their investment and it is widely known that an Inter-Ministerial Committee recommended banning cryptocurrencies.
“Investors who have acquired these instruments have done so with their eyes wide open, at their own risk and do not warrant any regulatory dispensation,” he declared. He also said that there is no data to justify how many investors have invested in these instruments and the amount of investment.
- Superficial to say a ban won’t be effective: He labelled the argument that a ban will be ineffective as superficial. “One might as well argue that drug trafficking is a rampant phenomenon despite a ban, and therefore drug trafficking should be legalised and regulated,” he highlighted.
- Cannot permit crypto as an investment asset: T Rabi Sankar said that the case of allowing crypto as an investment asset “appears to be made more with hope than with any real conviction”. “Not allowing them as currency would still amount to cryptocurrencies being used as a store of value. ‘Store of value’ demand is a more substantial source of demand for a currency than transaction demand,” he argued.
- Difficult to regulate cryptocurrencies: Cryptocurrencies are outside official control and they cannot be regulated by country-specific regulators, T Rabi Sankar noted. He posed questions such as how India would regulate and redress a case of mis-selling as it has no access to the ledger or to any audit trail. He also said that the central bank would not know to whom the regulatory action would be directed and stressed the lack of regulatory redressal for investors.
What are the risks identified by the deputy governor?
The RBI’s deputy governor refused to believe that crypto is a useful store of value and warned that if a threshold number of people decide to opt out, the entire value can collapse to nothing.
“For all the hype about a revolutionary innovation, cryptocurrencies themselves do not appear to be designed to meet any need in the finance space that is currently not being met or to meet existing needs more efficiently,” he asserted.
Will replace rupee eventually: “The retrograde step back to private currencies cannot be taken simply because technology allows it (it always did, actually) without any consideration for the dislocation it causes to the legal, social and economic fabric of society. The role of the Rupee as currency will be undermined as there would be a parallel currency system in the country,” T Rabi Sankar informed the gathering while highlighting the risk of dollarization.
Adversely impact India’s foreign exchange reserves: The deputy governor suggested that private cross-border flows are taking place in cryptocurrencies. “As they are non-reserve currencies, this could have adverse implications for India’s foreign exchange reserves, which lend stability to the external sector,” he observed, pointing out the risk of serious macroeconomic stability issues.
Bypass KYC and AML/ CFT measures: Cryptocurrencies can bypass established intermediation and control arrangements that ensure the integrity of financial transactions, T Tabi Sankar said. “The fact that they are anonymous, decentralised systems that operate purely virtually makes cryptocurrencies particularly attractive to illegal/illegitimate transactions which have been largely filtered out of the formal financial system,” he opined.
Is there a definition for cryptocurrencies?
Cryptocurrencies are not currencies: Rabi Sankar said that currency has a sovereign issuer while adding that currency has always been either a commodity with intrinsic value or a debt instrument. “Cryptocurrencies do not conform to this understanding of a currency as they do not have an issuer, they are not an instrument of debt or a commodity nor do they have any intrinsic value. Currency needs trust, not everything that can be trusted is a currency. They do not, and should not, automatically become a currency for the larger society,” he warned.
- They are not financial assets: “Some countries tend to treat cryptocurrencies as a financial asset. This is also problematic because all financial assets have underlying cash flows and need to be some person’s liability,” Sankar said.
- Crypto has no utility: “There is also an effort to treat cryptocurrencies as a commodity. But commodities are tangible and have utility; cryptocurrencies have neither,” he remarked.
- They are not digital assets: It is doubtful to term crypto as digital assets because cryptocurrencies do not have underlying use, T Rabi Sankar said. “It is an electronic code (with no practical use) which has created enough hype such that people are willing to pay money to buy ownership rights to that electronic code, seemingly on the hope that someone else would buy it at a higher price in future,” he added.
Indian government in complete harmony with RBI: Finance Minister
The speech delivered by T Rabi Sankar assumes greater importance in the context of Finance Minister Nirmala Sitharaman’s remarks at a recent press conference.
She said that the Indian government and the Reserve Bank of India (RBI) were “on board” with respect to the treatment of cryptocurrencies even as discussions are on concerning regulatory treatment of digital virtual currencies, according to an Indian Express report. The government is yet to come up with a bill to regulate cryptocurrencies, after having listed it twice before the start of parliamentary sessions in 2021.
T Rabi Sankar’s comments echo the position adopted by RBI governor Shaktikanta Das who said that tulips had more value at the height of tulip mania in the 17th-century Netherlands than cryptocurrencies do in the present. It remains to be seen what form the official crypto bill takes at the end of the stakeholder consultation which is currently underway.
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