Prime Minister Narendra Modi’s meeting with finance minister Nirmala Sitharaman, Reserve Bank of India governor Shaktikanta Das and various stakeholders last week has outlined India’s stand on the cryptocurrency mania that is sweeping the global economic landscape. The message that came out was that it is not desirable to introduce or legalise cryptocurrencies. Blockchain-based technologies may have other financial sector applications that can definitely be pursued for digitising the Indian economy.
There is no harm in exploring the full potential of blockchain technology, but making cryptocurrency legal tender is a different ball game altogether. Cryptocurrencies cannot be treated as an asset that can be held, transferred or traded on market platforms. India cannot afford to gamble on cryptocurrencies on which even advanced market economies like US are dithering.
Union cabinet’s decision after several rounds of stakeholder consultations is significant as it seeks to ban all private cryptocurrencies. The Narendra Modi government’s move to introduce the digital rupee next year is a precursor to digitising the $3.08 trillion Indian economy. The digital rupee, which is to be introduced by RBI, will be backed by sovereign assets and guarantees like any other banking instrument or paper. Several central banks around the world are contemplating digital currencies as legal tender.
Cryptocurrency lobbies push for weak regulation
As the winter session of Parliament began earlier this week, lobbies continued to work behind the scenes to push the government towards either status quo on cryptocurrencies or their weak regulation. India does not need to be apologetic or apprehensive of its decision to slap a complete ban on private cryptocurrencies. This measure would insulate the Indian economy and markets from possible destabilisation due to these speculative instruments.
RBI governor Shaktikanta Das has cautioned on the instability and economic gloom that cryptocurrencies could create in India. The ban should not be viewed as anti-reforms or against new-age technologies. The youngsters who trade in cryptocurrencies on unregulated exchanges may find the decision a bit unsettling. It is estimated that around 15 million retail investors in India have an exposure of $6 billion in cryptos.
Given that cryptocurrency transactions cannot be brought under banking regulator RBI or markets watchdog Securities Exchange Board of India (SEBI), the best possible option is to ban them. Apart from the validity and valuation issues, cryptocurrencies can be misused for illegal activity, leading to national security issues. The enforcement directorate has unearthed crypto transactions worth around Rs 4,000 crore used to launder ill-gotten funds by economic offenders. India cannot afford to open another channel for tax evaders, corrupt officials and traders to legitimise their ill-gotten wealth.
Cryptos used to fund drug trade, terror
A recent study by the Paris-based Financial Action Task Force has flagged 56 million illegal transactions on a crypto exchange named Liberty Reserve that was busted by US enforcement agencies. Liberty Reserve is just one of the thousands of such exchanges that have mushroomed to enable illegal transactions. Drug trade, laundered funds, credit card fraud, identity theft, investment fraud and computer hacking scandals are linked to cryptocurrencies world over, according to the FATF report.
Cryptocurrency and exchanges by design do not allow any regulation and operate outside of banking channels in most countries including India. The Narcotics Control Bureau has revealed that payments were made using cryptocurrencies to acquire drugs recovered from a cruise ship owned by Cordelia Cruises which was involved in the recent drug bust off Mumbai coast. United Nations Centre for Counter Terrorism (UNCCT) had been pushing for a workable framework to prevent use of digital money including cryptocurrencies to finance terrorist activities globally.
The Regulation of Official Digital Currency Bill 2021, which will be piloted by finance minister Nirmala Sitharaman in the ongoing winter session of Parliament, may have to take a 360-degree view and ban all cryptocurrencies without exception. A SEBI panel has pointed out that since there are no underlying assets, cryptocurrencies cannot be bracketed as an asset class like stocks, debt paper, legal tender, real estate or commodities.
Even in advanced economies like the US, banking regulators are yet to make comprehensive plans on cryptocurrency. The Federal Reserve, Federal Deposit Insurance Corporation and Comptroller of Currency may take another year to create a regulation plan for cryptocurrencies.
China has gone ahead and banned cryptocurrencies. All mining operations are shut down to safeguard its small investors. In contrast, the European Union’s 27 members have different regulations on cryptocurrencies and digital coins. European Union Parliament will take more time to frame common rules and regulations on cryptocurrency.
As the Indian government is toughening its stand on cryptocurrency, there has been a deluge of advertisements peddling cryptocurrencies on various media platforms. In these ads the number of retail investors and investment values are fudged. A strong global cryptocurrency lobby seems to be at work in the country. This has made even flagging concerns on these speculative instruments look anti-reform and against free markets.
Saving economic policymaking from jingoist market mindset is crucial, considering the destruction caused by the global market meltdown of 2008-2009. British economists like Diane Coyle say even the existing market instruments are distorting forces that deepen inequality.
India is not like one of the Baltic republics where economic governance structures are non-existent. It doesn’t run on exotic market instruments like some European economies and the US. Indian economic management is distinctly different from that of China where a few Communist Party bureaucrats are in total control. Since India has its own thinking on economic issues, it needs to chart its own course on cryptocurrency as well.
(The author is CEO, Centre for Integrated and Holistic Studies, a New Delhi-based think tank. Views expressed are personal.)