Banning cryptocurrency perhaps most advisable choice open to India: RBI Dy. Guv

Cryptocurrencies, as per their proponents, have the potential to pay a critical role in how finance pans out in the future, said Reserve Bank of India (RBI) Deputy Governor T Rabi Sankar on Monday, adding that "there is open speculation about whether finance as we know it and banking as we know it can survive the rise of cryptocurrencies."

Delivering the keynote address at the Indian Banks Association 17th Annual Banking Technology Conference and Awards, the deputy governor elaborated on the basics of crypto, what useful social or economic role does it play, among other things.

"If cryptocurrencies are actually intended to revolutionise finance, we need to understand what precise role they play in finance," he stated.

On whether cryptocurrencies are useful as a store of value, Rabi highlighted that given the surge in value of some cryptocurrencies, it has been argued that they are. A closer look exposes that argument. For all the hype about a revolutionary innovation, cryptocurrencies themselves do not appear to be designed to meet any need in the finance space that is currently not being met or to meet existing needs more efficiently, he further noted.

"The innovation, if at all, is of distributed ledger, which, contrary to the claims of proponents, can flourish even if cryptocurrencies themselves are banned across the world," he said.

On the impact of private currencies or currency like products on the economy, the deputy governor of the central bank also added that every private currency will eventually replace the rupee to some extent. Consequently, the role of the rupee as a currency will be undermined. With one or more private currencies being allowed, there would be parallel currency system(s) in the country.

He also explained that thus, increased acceptance of cryptocurrencies would result in effective ‘dollarization’ of our economy. Dollarization, it is well understood, would undermine the ability of authorities to control money supply or interest rates, as monetary policy would not have any impact on the non-rupee currencies or payment instruments.

"When that happens, India loses not just its currency, a defining feature of its sovereignty, but its policy control of the economy. With loss of traction for monetary policy, the ability to control inflation would be materially weakened," he added.

Should cryptocurrencies be permitted and regulated in India?

For this, Rabi said, "From what we have seen so far, there does not appear to be any case to allow cryptocurrencies to be legitimized in India." Nonetheless various arguments have been extended to permit cryptocurrencies and subject them to close regulations.

Cryptocurrencies have specifically been developed to bypass the regulated financial system. These should be reason enough to treat them with caution, he said. "We have also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they are akin to Ponzi Schemes, and may even be worse," he added.

Additionally, they undermine financial integrity, especially the KYC regime and AML/CFT regulations and at least potentially facilitate anti-social activities. More substantially, they can (and if allowed most likely will) wreck the currency system, the monetary authority, the banking system, and in general government’s ability to control the economy. They threaten the financial sovereignty of a country and make it susceptible to strategic manipulation by private corporates creating these currencies or governments that control them.

"All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India," Rabi concluded.

Meanwhile, RBI Governor Shaktikanta Das had also recently reiterated that cryptocurrencies have no underlying value and are a threat to financial stability.

“Investors in cryptocurrency should keep in mind that they are investing at their own risk. They should also keep in mind that the cryptocurrency has no underlying, not even a tulip,” Das had said referring to the Dutch tulip bulb market bubble in the 17th century.

During her fourth Budget speech on February 1 this month, Finance Minister Nirmala Sitharaman had announced that all income from transfer of virtual digital assets will be taxed at 30 per cent.

Further, in order to capture the transaction details, Sitharaman also proposed to provide for TDS on payment made in relation to  transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold. Regulations for cryptocurrencies are awaited in the country.