Updated: November 18, 2021 9:42:58 am
On Tuesday, RBI Governor Shaktikanta Das once again raised concerns over cryptocurrencies. Speaking at the SBI Banking Conclave, he said that “there are serious concerns on macro-economic and financial stability”. The governor’s comments come days after a meeting chaired by the prime minister reportedly arrived at a consensus that steps taken by the government in the field of cryptocurrency should be “progressive and forward looking”. While the central bank is right to advise caution, an outright ban, even if enforceable, is not a prudent way forward. Considering the nature of cryptocurrencies, restrictions on such transactions may end up having the opposite effect, pushing them beyond the realm of scrutiny and making it harder to enforce the law in case of felony.
Globally, there does not appear to be uniformity in the regulatory approach towards cryptocurrencies. Countries are grappling with questions over the appropriate regulatory framework, and are opting for different approaches. For instance, on the one hand, El Salvador has permitted Bitcoin as legal tender, while on the other, China has imposed a blanket ban on all crypto transactions and mining. In India, the RBI had barred all banks from dealing in cryptocurrencies in 2018 but this was struck down by the Supreme Court in 2020. However, even as the central bank has voiced its concerns, the underlying blockchain technology does find support. Much depends on how a country views cryptocurrency — as a currency, an asset or a commodity? How it is classified will in turn determine the regulatory architecture, and thus the tax treatment. There are indications that the Indian government is likely to introduce a Bill on cryptocurrencies in the winter session of Parliament. Reports also suggest that the government could classify crypto exchanges as e-commerce platforms. But doing so would also raise questions about who would be the appropriate regulator.
There are legitimate concerns over cryptocurrencies. They stem from the fact that there is no underlying asset, no benchmark to assess their values against. Moreover, they are extremely volatile in nature. Considering the dramatic rise in investor interest in such currencies — non-fungible tokens are increasingly gaining traction — concerns over investor protection also need to be addressed. While sophisticated investors may not need guidance, retail investors — according to the RBI governor, 80 per cent of crypto accounts are small accounts of Rs 1,000 and Rs 2,000 — need to be cautioned about cryptocurrencies and the volatility associated with them. Issues of money laundering and financing of terrorism need to be grappled with. Considering this, a regulatory framework needs to be urgently framed. The apparatus will need to deal with myriad aspects of cryptocurrencies — sale, purchase as well as intermediaries like exchanges and trading platforms. The government would do well to tread cautiously. It must identify the associated risks, and create the regulatory architecture to address them.
This editorial first appeared in the print edition on November 18, 2021 under the title ‘Crypto opportunity’.