Why government should not delay cryptocurrency rules

Cryptocurrencies, without any underlying assets, pose a high risk to investors. According to data from crypto exchanges, there are about 1.5 crore Indians who have invested Rs 15,000 crore in cryptocurrencies. There are 350 startups that work in blockchain and crypto.

Why government should not delay cryptocurrency rules?

Although the RBI is clearly not comfortable considering cryptocurrency as a medium of exchange, the government's stance on the issue is unclear.

Experts said that in the absence of regulations regarding these instruments by the Reserve Bank of India (RBI) and the government, Indians investing in cryptocurrencies can place extremely risky bets. He said that any type of crypto transaction in India should be banned until the rules bring clarity. Madan Sabnavis, the chief economist at CARE Rating Agency, said, "Whether it is through the medium of exchange, as a mode of investment/asset, cryptocurrency transactions in India should be banned and made a criminal offense needed."

"Unless we have rules and an official view on it, crypto is no different from gambling," the veteran economist said. This comment is important at a time when investors are increasingly betting on cryptocurrencies.

Cryptocurrency is decentralized digital money, which is based on blockchain technology. Bitcoin and Ethereum poplar are cryptocurrencies but there are thousands of cryptocurrencies in vogue.

Crypto rush

Even though the Reserve Bank of India (RBI) and the government have not formed an opinion on cryptocurrencies, there are many Indians who have invested in the crypto market. According to data from crypto exchanges, there are about 1.5 crore Indians who have invested Rs 15,000 crore in cryptocurrencies. There are 350 startups that work in blockchain and crypto. Crypto exchanges, WazirX, Coinswitch Kubera, and other exchanges have seen a huge rush in demand from users, and crypto exchanges are placing heavy advertisements on investment.

  RBI has already expressed concern over cryptocurrency. On March 25, while speaking at the 7th edition of the India Economic Conclave, RBI Governor Shaktikanta Das said that the central bank had conveyed some major concerns to the government about cryptocurrencies. Das had said, "Both the RBI and the government are committed to financial stability. We have flagged some major concerns to the government on cryptocurrencies. The government will make a decision as soon as possible."

Regulatory action

In 2018, the RBI banned all banks from working in cryptocurrencies, but a Supreme Court order lifted the ban on a petition by the Internet and Mobile Association of India (IMAI). The court held that the RBI has the power to regulate virtual currencies, but in the absence of any law, the business of transactions in these currencies should be treated as a legitimate business which is the fundamental right to carry on any business Is protected by, trade or occupation under Article 19 (1) (g) of the Constitution.

Although the RBI is clearly not comfortable considering cryptocurrency as a medium of exchange, the government's stance on the issue is unclear. The government has proposed to introduce a bill to regulate cryptocurrency called The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The bill contains a provision to make any transaction in cryptocurrency illegal. But there is no clarity on when this bill will be introduced in Parliament.

Why do people buy crypto?

There are not many attractive investment options in the current economic climate, where real interest rates have turned negative. With the rapid decline in the interest rate, bank deposits have become unattractive to investors. Similarly, high volatility and sluggish economic environment have made real estate, equity, and mutual fund investments unattractive for HNI investors, prompting many of them to look at crypto bets.

The poor rate of return on banking investment, due to a mix of factors such as the COVID-19 crisis, stands to gain cryptocurrency popularity as it is seen as having the potential to become a good investment option, such as gold or real estate, BCT. Jaya Vaidyanathan, CEO of Digital, said if some provisions are found.

"It is still far away, but it can happen over time. Until it is fully evaluated, we will see a lack of trust from the authorities. However, bitcoin was viewed with caution and mistrust by the authorities." But its underlying technology, blockchain, also has a lot of advantages in today's digital banking context, ”said Vaidyanathan.

What if cryptocurrency is banned in India?

The lack of clarity on regulation will mean that crypto investors may face higher risks if the government decides against cryptocurrencies in India. Experts said that if India decides to ban cryptocurrency assets tomorrow, those holding crypto assets may face a sudden setback.

"There is no inherent to cryptocurrencies, so it is highly risky for someone to use it as an asset. You certainly cannot consider it as a means of exchange. Of the high volatility seen in recent times Also, it is absolutely clear that it is a speculative asset, ”said Ashwin Parekh of Ashwin Parekh Advisory Services.

"Apart from this, there is also a possibility of illegal elements using crypto for money laundering activities," Parekh said. Parekh said that large investors such as Tesla founder Elon Musk may bet on such assets, but ordinary investors may face higher risks.

Banks are also cautious about cryptocurrency due to RBI not clarifying its position.

"Central banks advocate centralization of the economy and its banking system. Bitcoins or most cryptocurrencies, for that matter, are the opposite. They are not controlled or even governed by the regulators of a country," BCT Vaidyanathan of Digital said.

"In such circumstances, it is natural for regulators to suspect them, leading to trade restrictions or stricter regulations. In 2018, a lot of Indians were trading in cryptocurrencies, convinced of their benefits. But soon, This was questioned and declared illegal, ”said Vaidyanathan.

A senior banker, who did not want to be named, said banks are staying away from crypto transactions as the RBI has not officially clarified its position. “For us, RBI is the supreme authority. We will not touch this clause until RBI clarifies its position.

In the past, uncontrolled investment and financial institutions have resulted in major crises. An example is the unregulated chit fund market that was flourishing in India. In the absence of regulations, there have been several cases of operators operating overnight, resulting in heavy losses to customers.

There are also other examples such as microfinance and gold loans where a crisis situation has arisen due to lack of regulation. The root cause of the 2010 Andhra Pradesh microfinance was the illegal operation of a section of micro lenders. The RBI later made rules to regulate these companies. Similarly, until the beginning of the last decade, the gold loan lending market was also an uncontrolled market, bringing strict criteria on loan-to-value ratios and disclosures. Until then, local lenders continue to charge interest rates on such loans.

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