Updated: June 9, 2022 4:46:37 pm
There appears to be a case for regulatory arbitrage with respect to cryptocurrencies, and in the absence of a centralised regulatory authority, it could only imply there is a “world of Caribbean pirates” or a world of “winner takes it all”, Chief Economic Advisor V Anantha Nageswaran said Thursday.
For the economy, he said the government was performing a “high-wire balancing act” for fiscal deficit, growth, keeping cost of living lower for the poor and ensuring stable external value of the rupee, adding that many countries were facing a similar situation and that India was relatively better placed to deal with challenges.
When monetary policy becomes restrictive and higher interest rates are available from traditional instruments, it is not clear whether the innovations such as decentralised finance or cryptocurrencies will continue to thrive or not, he said. “If it’s something that would be a source of value or alternative to Fiat currencies, it has to satisfy many purposes. It has to be a store of value, it has to have widespread acceptability and it has to be a unit of account,” he said.
Innovations such as cryptocurrencies or DeFI (decentralised finance) are yet to pass the test. “So I wouldn’t be very excited by them because sometimes we may not be fully aware or comprehend the kind of forces we are unleashing on ourselves. So I would be somewhat guarded in my welcome of some of these fintech-based disruptions like DeFI and crypto etc.”
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“The more decentralised they become and the absence of a watchdog or a centralised regulatory authority also means that there is a world of Caribbean pirates or a world of ‘winner takes it all’ in terms of being able to really take it all from somebody else. Also the recent developments with respect to Luna, Terra are definitely very important cautionary tales that we need to keep in mind,” he said.
He said though DeFI is considered innovation, he would reserve his judgment on whether it is truly disruptive in a positive sense or is it something that “we will come to regret”. “Many things developed in this manner, in unregulated fashion, and it is a wild guess at the beginning and that is what leads to eventual regulation, some kind of rules of the game etc paving the way for orderly growth etc,” he said at an event organised by Assocham.
“Much of what is happening in the space of crypto or DeFI and I completely endorse what Rabi Sankar, RBI deputy governor, has been saying: as of now there do appear to be a case of regulatory arbitrage rather than a case of true financial innovation in my opinion,” he said
On June 2, reiterating the Reserve Bank of India’s stance of banning cryptocurrencies, Sankar had said that introduction of central bank digital currencies could “kill” the case for existence of private cryptocurrencies. “We believe that CBDCs (central bank digital currencies) could actually be able to kill whatever little case there could be for private cryptocurrencies,” he said at an event organised by the International Monetary Fund.
Earlier, RBI Governor Shaktikanta Das cautioned investors against investing in cryptocurrency, saying it does not have any underlying asset. He had also said that cryptocurrencies were a threat to macroeconomic and financial stability. The government had in the Budget proposed tax on gains from virtual digital assets. Last week, the economic affairs secretary said a consultation paper on cryptocurrencies was almost ready.
On the economic front, Nageswaran said having certainty about the economy was like procuring crude oil cheaply. “It’s just not possible because there are so many forces and so many developments that are foreseen and unforeseen that can shape outcomes with respect to growth, inflation, external value of the rupee etc. All that I can say is that the government is aware that the hard-earned gains of last four years in terms of macroeconomic and financial stability cannot be frittered away and therefore it is pursuing a high wire balancing act with respect to the four variables that I mentioned — fiscal deficit, economic growth, keeping the cost of living lower for poor and low income households and ensuring the value of the rupee doesn’t weaken so much that it becomes a source of inflation by imports. It is a balancing act and many countries are facing a very similar situation,” he said.
He said India was doing relatively better than other countries. “The intensity and magnitude of the challenges that others face are even higher. For example, yesterday OECD released their forecast for 2023 and if you look at their growth forecast for several countries that they have released and look at the forecast for India, we should be relatively happier relatively comfortable that considering the challenges that many countries are facing, we are relatively better placed to deal with them but we are aware of the challenges and the responsibilities,” he said.
The Organisation for Economic Cooperation and Development has forecast 6.9 per cent growth for India in FY23, sharply down from 8.1 per cent estimated earlier and below the Reserve Bank of India’s forecast of 7.2 per cent. India had recorded a GDP growth of 8.7 per cent in 2021-22. The World Bank had on Tuesday cut India’s FY23 growth forecast to 7.5 per cent from the earlier estimate of 8.5 per cent.
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