The Reserve Bank of India (RBI) has been crying itself hoarse over these issues for some time, and now favours an outright cryptocurrency ban over the most stringent regulation. The regulator initially forbade local banks from dealing with cryptocurrency exchanges in 2018. But its circular was struck down by the Supreme Court in 2020 on the grounds of ‘disproportionality’. At the time, GoI chose not to intervene.
Cryptocalypse Ahead!
Now, more than two years later, when the monstrous proportions of a potential cryptocurrency apocalypse are evident, could the government possibly have any further excuse to foil the central bank’s desire?
The deleterious effect of the cryptocurrency bubble may be seen everywhere. In 2021 alone, it is estimated that cryptocurrency-based fraud grew by about 50% year-on-year, with tens of thousands of individual investors being cumulatively diddled out of more than $1 billion. Of more significance than the ticket value of these fraudulent transactions themselves was the creative nature of the stratagems employed.
Some swindlers took recourse to a rug-pull mechanism – a la the Squid coin scam – in which the demand for, and value of, a non-fungible token (NFT) grows exponentially with investor money before the scammers disappear with the cash and leave the buyers holding nothing. Other con artists have used more tried-and-tested means like romance scams, phishing schemes and fake cryptocurrency exchanges. And, as the proliferation of Web 3.0, decentralised finance and NFTs exacerbate the creative nature of this trickery, blockchain-verified crypto transactions, which are already harder to recover when lost to theft because they do not run through regular financial institutions, will become the mainstays of financial duplicity.
If rampant fraud is not argument enough to proscribe cryptocurrencies, price volatility and the Ponzi scheme nature of many crypto exchanges should add weight to RBI’s contention. A prevailing myth in the cryptocurrency community is that the tokens they issue are secure investments and are a foolproof hedge against inflation. This is wishful thinking. If cryptocurrency were, indeed, a ‘currency’ pegged to something whose value did not suffer the slings and arrows of outrageous inflation, this would be true. For all its posturing as an alternative to unstable money and unreliable assets, however, it is simply another asset class whose value is eventually rendered in dollars.
And that value has see-sawed considerably because of speculation and the short boom-and-bust cycles that crypto exchanges seem heir to. In the last two months alone, firms like Terra and Celsius have ceased to exist. It is estimated that investors have seen a $2 trillion erosion (from a high of $3 trillion last November) in the value of their cryptocurrency holdings in 2022, and many currencies have seen a 70% dip in the number of transactions since the beginning of the year.
When the Stablecoins Bolt
In the larger scheme of things – the global stock market is valued at $100 trillion – this may not seem like much. But if other stablecoins – tokens that may be linked to fiat currencies or exchange-traded commodities – collapse, it may pose a systemic risk to the larger financial system.
Finally, one cannot speak of cryptocurrency without commenting on its principal value beyond that of an investment – enabling illegal transactions and money-laundering. Some estimates suggest that money-laundering through cryptocurrency platforms increased 30% year-on-year in 2021, a rate that will only increase in the future. In a country like India, where tracking and monitoring black money is a Herculean task, the challenges associated with regulating highly movable cryptocurrencies – whose public keys cannot be easily traced to an individual and whose private keys provide best-in-class protection and anonymity – may prove to be insurmountable.
It took nine-and-a-half centuries and the fell hand of Napoleon to put the Holy Roman Empire and its shenanigans to bed. How long will it take GoI to ban, or stringently regulate, cryptocurrency? On July 19, Nirmala Sitharaman opined that to debar cryptocurrency transactions, India would need to collaborate with other countries to prevent regulatory arbitrage.
Does a nation only ban products that are inherently dangerous or harmful if other countries agree to follow suit? In any case, the US, Britain, the EU and Singapore have all expressed a wish to enact draconian legislation that would severely restrict cryptocurrencies. Not wanting to deal with a protean problem that could become all-pervasive, China’s central bank has banned them.
The answer may lie with special interests and in allowing favoured worthies time to recoup their investments. Or, perhaps, the answer lies in being able to take a decision by avoiding it altogether – the best proof against nagging doubt and the unknown – and allowing future catastrophes to sleep until they wake of their own accord.
