Govt must address regulatory concerns
Given the huge surge of trading interest in cryptocurrencies, the government needs to create a regulatory framework for these virtual assets on a priority basis. Indeed, the Reserve Bank of India (RBI) Governor Shaktikanta Das has said that legislative and regulatory action pertaining to cryptocurrencies may be announced in a “very short time”. He is also unequivocal that the RBI has “serious concerns” about these assets as they represent a danger to macroeconomic and financial stability, although the central bank’s panel, which is tasked with studying these, is expected to submit its report only in December. The government is also holding a closed-door meeting with representatives of cryptocurrency-trading exchanges and other cryptocurrency stakeholders next week. Since March 2020, when the Supreme Court ruled it was legal to trade these instruments, and Indian banks could offer financial services to cryptocurrency-trading exchanges, trading volumes have soared. Conservatively, over Rs 50 crore is traded every day in crypto-assets by resident Indians, using rupees. Anecdotal evidence suggests far more is invested by non-resident Indians. Moreover, Indians are also showing an interest in the related segment of non-fungible tokens (NFTs), with many celebrities releasing products into that virtual space.
The advertising blitz showcasing cryptocurrencies and NFTs indicates India is seen as a key market for these virtual assets. Anecdotal evidence also suggests these are extensively used to manage the efficient transfer of remittances. They are both quicker in effect when it comes to cross-currency transfers, and carry far less in the way of transfer charges, assuming the user is prepared to stand the price-volatility. Indeed, the ease of remittance is one big reason why cryptocurrencies have become popular. El Salvador’s stated reason for adopting bitcoin as an official currency is precisely its dependence on remittances, and Facebook is trying to stitch together a cryptocurrency alliance to enter the remittance market. There is no doubt these are volatile, high-risk instruments. It is also true many cryptocurrencies are issued by fraudsters, seeking to make a quick buck. And these assets can be used to enable cybercrimes, including ransomware.
However, while these downsides may be obvious, such instruments are here to stay. They have survived and thrived through several global financial crises over the last decade. Many savvy investors see these as a hedge against inflation, and against shocks like demonetisation. The returns from several of these virtual currencies have been phenomenal. Arguably, by drastically reducing the barriers to currency conversion and providing alternative frictionless routes for transfers and remittances, these virtual currencies will force a reduction in remittance fees and the speeding up of transfer procedures. Since these are instruments traded in good faith by many Indians, it would be harsh to ban them. It would be impossible to enforce a ban without imposing draconian currency controls. It is legal for a resident Indian to remit money abroad for many purposes, including trading overseas assets, via an overseas trading account. Attempting to impose currency controls would be deeply regressive, hurting importers, exporters, and students overseas. Therefore, it would be sensible instead for policymakers to work out a comprehensive plan for such instruments and clear the air. This will not only enable the central bank to manage financial stability risks and protect investor interests, but also give clarity in terms of taxation. The government would also do well to run mass awareness campaigns to inform investors about the risks associated with such instruments.