At a time when there is no end in sight to the Covid-19 pandemic, which has severely challenged the governance system on all fronts, the issues around the monetary system, particularly the use of physical currency in payments, has put the government in a dilemma.
Even as the digital mode of payments is becoming the most preferred mode in the financial transactions, it is the use of virtual currencies, popularly known as cryptocurrencies, which is making loud noise in the Indian monetary system. Here it is worth mentioning that the penetration of cryptocurrencies in the monetary system is not virus-induced, but these virtual currencies had breached the financial and monetary regulatory boundaries much before the coronavirus outbreak.
The continued resistance shown by the Reserve Bank of India (RBI) with the backing of the government against the growing use of cryptocurrencies outside the traditionally well-regulated financial system has been an attempt to stamp these virtual currencies as ‘illegal’ and keep the domestic (Indian) investors away from this investment. But, over a period of time, the regulator’s resistance has only attracted more and more investors into the cryptocurrencies and millions of Indians have invested in this class of asset.
Remarkably, we haven’t seen any kind of volatility in the crypto market as we frequently witness in the equity markets. Of course, we witnessed downward price movement of some virtual currencies, but that didn’t deter the investors from continuing to invest. In fact, the crypto market has always been a bull market and rarely do we come across investors losing money on this platform. Some examples of this virtual currency are Biticon, Ethereal and Ripple. Bitcoin is the largest and oldest of cryptocurrencies, which is trading at a huge premium across various global exchanges, including India.
Frankly speaking, some five years back, these virtual currencies were beyond the comprehension of the majority of common investors and even it was a new subject of debate for the financial experts/consultants. It was after demonetization in November 2016, which shook the confidence of people on fiat currency; the general public started scrambling for alternative payment and investment options. It’s here the virtual currency started emerging as one of the strong and profitable alternatives in the digital money segment.
Precisely, today the cryptocurrencies are not considered legal tender like the fiat money issued by the governments. Despite the regulatory constraints, the crypto market has hit the $2 trillion mark and the investors have positioned these as one of the trusted digital assets. Interestingly, these virtual currencies have informally been a critical part of the global payments system as a fast and comfortable means of payment across the globe.
Despite gaining broader acceptance and growing user-base, the laws and regulations in the country around the cryptocurrencies continue to remain unclear and the scare among crypto investors still exists. However, the crypto-fear is not confined to its investors, the monetary regulatory authorities has been fearful since June 2013 when the virtual currencies figured in the financial sector report of the Reserve Bank of India (RBI) and in December 2013, the regulator issued a warning cautioning users of virtual currencies against risks. It was the time when India already had few cryptocurrency exchanges and services running. This impacted the operations and the virtual currency trading was called a violation of the Foreign Exchange Management Act (FEMA) rules.
However, in December 2014, the then RBI Governor Raghuram Rajan infused new blood among investors when he said, “I have no doubt that down the line, we will be moving towards a primarily cashless society...and we will have some kinds of currencies like this (Bitcoin) which will be at work. I think these virtual currencies will certainly get much better, much safer and over time will be the form of transaction, that’s for sure.”
Rajan as RBI governor lending support to the cryptocurrencies didn’t dispel fear among the governing system. The government got locked into an opinion about these virtual currencies as money laundering tools. In April 2018 , the government of India (GoI) asked banks not to allow any kind of transaction involving investment in cryptocurrencies. This gave a big jolt to the crypto market and the move drove many crypto exchanges out of business in India.
Interestingly, despite the regulator’s refusal to lend any regulatory support to the virtual currency, the investment portfolio in these digital assets grew (and continues to grow) exponentially. As a matter fact, time killed the fear factor among its investors and we witnessed new investors boarding the platform.
However, it was a shot in the arm of crypto investors when in June this year, the RBI clarified that banks and other entities cannot cite its 2018 order on virtual currencies as it has been set aside by the Supreme Court of India in 2020. The Central Bank stated, "Banks, as well as other entities, may, however, continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances."
The clarification from the central bank came as a sign of relief for all investors and crypto exchanges in India who invested in virtual currencies. This
Meanwhile, the RBI Governor, Shaktikanta Das, stated that the apex bank could come up with a pilot of its fiat digital currency by the end of this year. Earlier, during the last monetary policy review on August 6, Deputy Governor of the RBI, T Rabi Sankar, had said that the central bank is expected to launch a fiat digital currency by December.
Launching fiat digital currency is no substitute for cryptocurrency. These are entirely two different things. The Indian investors holding cryptocurrencies in their investment portfolio cannot be ditched for a digital rupee. It would be best in the interest of the nation if cryptocurrencies are allowed to be part of our monetary system and be a player in this fastest growing virtual currency trillions-dollar industry. There are expert opinions which believe that cryptocurrencies can be used as a tool to strengthen national security, economy, currency, technology, and even foreign policy.
So, to conclude, a blanket ban on cryptocurrency is not the way to go forward. It’s to be understood that it’s a mainstream investment for millions of investors (reportedly 60 to 70 lakhs) in the country. It needs to be evaluated in the given huge potential associated with cryptocurrency. A crypto market expert says, “It is the need of the hour to regulate cryptocurrency with a coherent and well-structured regulation rather than banning them altogether especially since the market has seen a huge boom at a time when the country is fighting the Covid-19 pandemic as well as an economic downfall. This would also help the government tax the crypto trading that would consequently help in generating more revenue.” So cannot India strike the chord to be a global leader in framing the regulations for the crypto market?
(The views are of the author & not the institution he works for)