Today Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India, delivered a keynote address at the Annual Banking Technology Conference and Awards. He told that they examined the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny.
For the entire keynote address, please click here.
Here are the arguments from him that can make the crypto investors and enthusiasts worried:
Blockchain or Distributed Ledger Technology is a promising technology where Indians might have a global edge. Banning cryptocurrencies would affect the absorption of DLT technology in India.
Most major countries are not banning cryptocurrencies, but are considering some kind of regulation.
Many Indians have already invested in cryptocurrencies and banning it may lead to wealth loss for them.
Banning in any case is unlikely to be effective because by its very nature cryptocurrencies can be acquired and traded in an anonymous manner.
29. Cryptocurrencies are typically native to a blockchain. For instance, bitcoin is the native coin (or token) of the Bitcoin blockchain, or, ether is the native currency of the Ethereum blockchain. They can be used as units of account to settle transactions or they can be used as tokens to reward work done in the blockchain, say, for mining. Either of these two functions do not appear to be essential to the basic function of a blockchain. It should be possible to maintain a blockchain without any native cryptocurrency if transactions are authenticated centrally. Even in case of private authentication through consensus mechanisms, accounts can be kept and rewards can be given in any legal tender currency. In other words, creating native cryptocurrencies is just one way of implementing a blockchain; it can be viewed as just one use case of the blockchain technology. To argue that banning cryptocurrencies would stunt the absorption of blockchain technology is therefore akin to saying that banning human cloning would kill innovations in biotechnology or banning nuclear weapons would hurt nuclear physics as a discipline. There are many other uses of blockchain technology or more generally, distributed ledger technology, that do not involve creation of a virtual currency. Thus, claims that cryptocurrencies must be permitted for blockchain technology to thrive are not sustainable.
30. An argument often advanced against banning cryptocurrencies is that advanced economies (AEs) are not resorting to such bans. While replicating the practices followed in AEs is often an acceptable route to reforms, as far as cryptocurrencies are concerned, it has to be noted that India is not similarly placed as AEs. We should particularly be alert to the possibility that these private currencies can be used for global strategic control. If, for example, some private currency substantially replaces the Rupee, the corporate which manages that cryptocurrency (or the country which has control of that corporate) can practically control India’s economic policy. There are a number of other reasons why it might be in the interest of AEs to not ban them, as below.
Almost all cryptocurrencies are priced in terms of Dollars (or potentially any of the freely convertible currencies). Wider adoption would actually result in wider use of these currencies. So cryptocurrencies are not a threat to convertible currencies as they are to the Rupee, which is not an international currency. Following the example of AEs in the matter of cryptocurrencies would effectively amount to working against the interest of the national currency.
Most cryptocurrencies are owned by businesses of AEs; therefore, better adoption of cryptocurrencies would add to their growth and employment. Significantly, it might be of advantage to the AEs if cryptocurrencies replace emerging market (EM) currencies as that would give AEs a better strategic control on the EMEs.
AEs have more mature markets which can withstand the potential disruption from cryptocurrencies. They are, therefore, in a better position to wait and watch.
AEs have quicker legal systems and hence concerns of misuse of cryptos can be addressed through the legal systems. In India, on the other hand none of the major instances of consumer exploitation have been redressed legally (e.g., the mis-selling of derivatives in mid 2000s).
AEs have the political power to control the crypto companies. The recent instance where the US recovered bitcoins from the hackers of the oil pipeline in US, is an example that notwithstanding claims of non-traceability of cryptocurrencies, AE Governments wield enough power to access the records. India or most other countries would lack such advantages.
31. Another argument often advanced is that so many Indians have already invested in cryptocurrencies and banning cryptocurrencies would lead to a loss of wealth for them. There are three reasons such arguments do not appear justified. One, banning in India does not mean investors would lose money, because they can be provided with a reasonable exit. Two, persons who have invested in these instruments are fully aware of the risks involved. Reserve Bank has been warning investors of the risks for nearly a decade. That an Inter-Ministerial Committee of the Government has recommended banning cryptocurrencies was widely known for the last three years, as was the fact that cryptocurrencies are not regulated products and there are no investor protection norms in place. Investors who have acquired these instruments have done so with their eyes wide open, at their own risk and do not warrant any regulatory dispensation. Three, there is no data to justify how many investors have invested in these instruments and what is the amount of investment. Data informally gathered in November seems to indicate that crypto investments by Indians is nowhere near to being significant (although the pace of growth could make it a concern in future). This data showed9 that four out of five investor accounts10 held investments of less than Rs.10,000, with an average holding size of Rs.1,566. Wealth loss, if at all it is a possibility, is likely to affect only a small fraction of these investors.
32. Interestingly, concentrated ownership appears to be characteristic of cryptocurrencies. As a January 2021 report published in The Telegraph11points out: “According to industry data, around 13% of all Bitcoin sits in the hands of just over 100 individual accounts.” They are referred to “crypto whales”. Such concentrated ownership, usually by creators or initial investors, in what is touted to be (or at least hoped to be) the alternative monetary system, would make that system prone to manipulation.
33. That cryptocurrencies should not be banned because a ban is unlikely to be effective is a superficial argument. One might as well argue that drug trafficking is a rampant phenomenon despite a ban, and therefore drug trafficking should be legalised and regulated. If cryptocurrencies are banned, the vast majority of investors who are law abiding would desist from investing. Those few elements who would continue to invest will essentially be carrying out an illegal activity. Such exceptions should reinforce the need for a ban, rather than invalidate it.
Earlier this month, Finance Minister Ms. Nirmala Sitharaman had proposed a 30% tax on gains made from any private virtual digital assets from April 1. The budget has also proposed a 1% TDS on payments towards virtual currencies beyond Rs 10,000 in a year and taxation of such gifts in the hands of the recipient.
After these 8-years of prolonged uncertainty over cryptocurrencies, the budget announcement may have come as a big relief to many. However, the new remarks from RBI’s Deputy Governor have probably put everything in a different perspective. It is definitely a concern for the crypto community for now.
