The central bank deserves praise for its firm stance on cryptocurrencies, from time to time warning investors about their inherent risks, despite the silence of the center.
On November 17, 2021, the Moneycontrol column stated why investors in crypto assets should not ignore the repeated warnings of the Governor of the Reserve Bank of India Shaktikanta Das about the possible risks associated with virtual currencies (read here).
Das and his colleagues from Mint Road are fighting a tough fight against the legalization of cryptocurrencies. One of the Das deputies even publicly called for a ban on cryptocurrencies in February 2022 (read here).
Why is the RBI so opposed to cryptocurrencies?
The Reserve Bank of India has repeatedly pointed out the following factors.
Firstly, cryptocurrencies cannot be defined as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; they are akin to Ponzi schemes, and they can be worse.
Secondly, cryptosystems undermine financial integrity, especially the "know your customer" (KYC) and Anti-Money Laundering (Anti-Money Laundering/Anti-Terrorist Financing) systems. This is likely to encourage antisocial activity.
Thirdly, encryption technology is based on the philosophy of evading state control. They were designed specifically to bypass the regulated financial system.
Fourth, the argument that encryption portends the emergence of a new technology is wrong. The blockchain technology on which it is based is 10 years old, and it can develop even without cryptocurrencies.
Crypto Campaign
Recall that the repeated warnings from Mint Road came at a time when the crypto lobby was launching a nationwide campaign to attract new investors to the unregulated virtual currency market in India.
At some point, ads appeared in newspapers offering crypto trading training to individual investors.
The Reserve Bank of India had to clarify in an April 2018 circular that it had imposed restrictions on cryptography after the Supreme Court overturned it in 2020.
But by that time, banks had received a silent message from a concerned regulator — to stay away from crypto transactions.
Then there was the collapse of global cryptography…
A year after the Das warnings, the Indian banking regulator had the last laugh in the cryptocurrency dispute. Cryptosystems are collapsing all over the world. The value of major cryptocurrencies, including Bitcoin and Ethereum, has fallen.
Numbers
The Polkadot coin, introduced in November 2021, has fallen in price by almost 85%, and bitcoin, whose value in April 2021 was more than $ 63,000, has now decreased by almost 75% compared to this level. Ethereum, which peaked at around $4,800 in November, has since fallen 73% in 2021. The Binance coin, which cost $ 670 in May 2021, has now fallen by 58%.
The FTX bankruptcy is likely to be the last blow to the global cryptocurrency lobby. FTX's bankruptcy has led to a further drop in morale; Toronto-listed cryptocurrency mining companies expect further turmoil and an ongoing crisis of confidence in digital assets following the collapse of Sam Bankman-Freed's Bahamas-based FTX. (To read how FTTx collapsed, read this)
Indian investors also faced difficulties. According to Moneycontrol, many Indian investors, especially young people, are facing a crisis after they lost their hard-earned money in the process of selling cryptocurrencies.
Cautious Reserve Bank of India Rescues Investors
The Reserve Bank of India has done an excellent job of warning investors about the risks of assets that have no fundamental value or regulatory protection and that can be easily manipulated.
The Reserve Bank of India's dislike of unregulated and risky financial instruments and schemes involving poorly managed institutions is well known. There have been many cases in India over the past few years where retail investors have lost money by investing in complex, risky and often unregulated instruments and institutions.
Examples include large retail investments in unregulated credit funds, poorly managed cooperative banks, and private financial institutions. According to the central bank, such events should also not occur in the unregulated cryptocurrency market.
Are the Reserve Bank of India and the government on the same wavelength?
This is the biggest question. Double standards in India regarding the opinions of both the Reserve Bank of India and the government are hurting investors.
On the one hand, the Reserve Bank of India is running a campaign calling cryptocurrency a "clear risk" that has no underlying assets, warning investors not to risk their money. On the other hand, the government is silent about its legality, but is busy collecting taxes on transactions in digital assets. At the same time, investors are desperately looking for clarity.
The chaos shows that either both sides are not talking enough to each other on this issue, or, even worse, they are not able to talk well about it. The most disturbing thing is that the always ambitious Indian crypto lobby has hired spin masters who deftly play on the silence of the government, considering taxation as recognition of the legitimacy of virtual assets. This makes investors even more confused.
There is no clear policy regarding crypto transactions in New Delhi. In the past, the government constantly said it would develop a scheme soon, but it never happened. Meanwhile, the government is busy collecting taxes both from the profits from transactions and from the issuer.
This is when the Reserve Bank of India, under the leadership of Shaktikanta Das, continues to warn investors about crypto transactions. Nawab Das publicly calls for a ban on cryptocurrencies, listing risks and more serious macroeconomic risks.
The eloquence of the Reserve Bank of India and the dead silence of the Narendra Modi government regarding crypto regulation do not converge.
A Failed Crypto Dream
For an ignorant young investor, cryptocurrency is like a magic stone, which they have heard about in fairy tales, which turns everything into wealth overnight. For them, this makes sense because accumulating wealth in stocks takes a lot of time, real estate assets struggle with declining demand, and fixed income instruments give negative rates. The crypto lobby understands this psychology well and makes a big bet on it.
The current collapse in the crypto market around the world provides an excellent opportunity for the government to clarify its position on regulation.
All the risks that the central bank warns about are now quite logical. The only solution to India's crypto dilemma is rapid regulation - or outright ban.
The reluctant government has recently published a consultation paper seeking the views of various stakeholders on cryptography. Hopefully this time it will lead to clear rules.
Until then, the crypto lobby will continue to play on the psychology of investors, while the government is busy collecting taxes from transactions using a tool that deprives the Central Bank of sleep.