Tag: regulation

It is quite timely that the government and regulators are looking closely at cryptocurrency. The interesting part is that it does not come under SCRA and hence SEBI is not involved. It does not involve financial institutions and hence RBI is out. It has not been declared illegal by the Courts and hence the government cannot do anything as of now. It is a unique fad because it is prevalent across the world and more importantly it trades without there being any underlying value.

Crypto is a creation of the imagination which is protected by technology and brought on to several platforms which enables trading. Anyone can start their own crypto, but multitude of people need to believe in it and start trading. Not surprisingly even though there are over 7,000 such currencies not more than 10 are actively traded and command value. Clearly lots of people have tried floating their imaginary currencies and have failed. It runs on belief and trust with no regulators to lay down the rules.

Two things stand out here which needs to be answered by regulators.

First, is whether it is being used as a mode of transaction. Currently there is no information if people are buying and selling property and paying partly in crypto currency. If such things are happening, then it is something the RBI should be concerned about, because we cannot have parallel currencies in the country. It is illegal to carry out transactions in foreign currency in India and while barter exists in some pockets it is not the rule. If a crypto is allowed to become a currency for transactions, then it will undermine monetary policy and the entire system of payments will go for a toss. And finally in case there is a crash in value, the investors will lose money for which there is no recourse.

Also, there is need to know more on how these transactions take place. There are exchanges which allow one to trade; and it is still unclear whether the transactions are in rupees and remain in this currency or get converted to dollars. If it is in rupees and mimics what happens to the crypto globally then it is not serious, but if there are conversions into dollars then there would be a FEMA rule to contend with.

The exchanges which promote trading in crypto are transparent in terms of doing a KYC of all players. This aspect needs to be clear because if there is conversion into dollars at any stage it needs to be within the guidelines put by the RBI.

Investment option

The second aspect is the investment option. If cryptos are being used as an investment option by people, then the nature of debate changes. The exchanges vouch that there is KYC done for every customer and that all taxes are paid on the gains. It is still not clear if the gains come under short or long term and the I-T Department will have to decide on this issue.

The broader issue is that if one can trade in imaginary currencies it does tantamount to gambling which is partly permitted in the country. Horse racing and the bets that go along with this avocation is legitimate as are lotteries. Casinos can operate in some States. If trading in cryptos fall in this category, then as an extension it can be argued that people should be allowed to gamble on cricket matches too and there should be a level playing field.

Therefore, there is need to do a deep dive analysis into this entire issue of crypto currency as the level of interest is high and increasing. Part of the reason is that people want to make quick money and the present avenues of savings — bank deposits which give a paltry return — makes these alternatives alluring. Allowing such investments also risks savings getting diverted for speculative purposes which is not good for an economy which normally has a big gap in savings and investments.

Besides people investing should know what they are up against. SEBI runs strong campaigns along with the stock exchanges to caution investors on trading as well as investing in mutual funds which all have ‘underlying’ products like shares, commodities or bonds. For something fictional, people need to know what they are up against, because when there is a crash there can be an issue. The price of bitcoin had risen from $8,527 on March 1, 2020 to a high of $62,986 on April 15, 2021 and then fell to $30,822 on July 20, 2021. It again crossed $67,000 on November 9. Intuitively it can be seen that there would be several gainers and losers in this game and those who are in the latter category could be the ones who have been lured by the lucre.

Threat for central banks

Globally this has become a wave which cannot be stopped. Some states in the US accept bitcoins for transactions as do some of the Nordic countries. It is not a good precedent for central banks which will see their power over monetary policy getting denuded. Interestingly, the concept of crypto emerged on the premise that central banks and governments mismanage money and make them worthless with loose policies. This made the concept of bitcoin enticing driving its popularity.

The fear of a backlash at some point of time is palpable and this concept can be likened to a Frankenstein which may be hard to push back once it grows roots in the system. Ideally a call should be taken for sure to make it illegal for transactions as this strikes the edifice of not just the financial system but also monetary policy. On whether it should be allowed as a form of gambling, there can be further debate.

The government need not be concerned over people who are aware of the downside of cryptos, but the less financially literate need to be educated just as it is done for sin products. Maybe a bold print saying ‘trading in crypto can be bad for your financial health’ can be the beginning.

The writer is an independent economist and author of: Hits & Misses: The Indian Banking Story. Views expressed are personal