In the world of investments, the Covid-19 pandemic crisis has destroyed generic economic cycle with many businesses ruined. Systems and procedures governing the financial system are undergoing changes. Even as the full economic after-effects of the pandemic are yet to be felt, the crisis has opened up new opportunities as well.
When we talk of new opportunities in investments during the current pandemic crisis, we find cryptocurrencies, especially the Bitcoin, becoming the darling of investors as safe haven to protect and multiply their wealth. Of course, equity markets also witnessed boom as investors parked their money in ‘safe-haven’ shares during these unprecedented times.
Historically speaking, for thousands of years in times of war, economic collapse, and pandemics, gold as a safe-haven asset has been the traditional refuge for people to store their wealth. During the time of crises, the yellow metal witnesses massive buying and hoarding. Precisely, when a crisis occurs, gold becomes attractive and a price rally is triggered every time. The Covid crisis illustrates the criteria driving up the price of gold to never-seen-before levels.
We have an incredible advanced technology around us and if we look at pre-Covid era, we find many technological options were unexplored to avail the advantage of easing system and processes. Now the Covid-19 crisis has automatically prioritized digitalization of financial system and leveraging the new technologies has become inevitable. Among many things, the crisis got cryptocurrency into focus, which is expected to become a medium of payment and exchange in near future despite legal issues confronting these digital currencies.
Let’s have a brief about cryptocurrencies. These are not currencies in the typical sense, but sophisticated software programmes, considered as the ultimate wealth creators in the modern world. Blockchains are their core technology. There is no control of governments and central banks over these currencies.
It was Bitcoin which surfaced as the first cryptocurrency in early 2009. Currently the price of Bitcoin is on rampage. It has already emerged as credible form of currency at international platforms, despite many nations, including US hating it and pursuing hard to ban it.
In India, despite government threats of a ban, transaction volumes are swelling and 8 million investors now hold 100 billion rupees ($1.4 billion) in crypto-investments, according to industry estimates. Officially there is no data available.
Currently, all is not going well with crypto (Bitcoin) investors in India. Even as the central government is planning a cryptocurrency policy, a cycle of hope and uncertainty has been keeping the investors on tenterhooks. On one side, continued surge in its price keeps them luring to invest in the currency despite the fog of risky environment. On the other, they are fearful of a government backlash in the form of a ban on cryptocurrencies in the country. It’s a paradoxical situation for them, where they are caught in a whirlpool of ‘to be or not to be’ on the crypto platform.
In the past couple of days, the investors, particularly the crypto investors faced two contradictory situations. One suggesting them to hold on, while as the second situation left them fearful of losing their hard earned money invested in the cryptocurrencies such as Bitcoin.
On Sunday, Finance Minister Nirmala Sitharaman while speaking at an India Today Conclave categorically ruled out a much-feared blanket ban, promising to allow a window for people “to do certain experiments” using distributed ledger technologies, Bitcoin and other virtual currencies. The statement infused a sense of security in the local (India) investors and at the same time global crypto market heaved a sigh of relief.
But the relief was very short-lived as a global news agency, Reuters, leaked that India will bring a new law that will “criminalize possession, issuance, mining, trading and transferring crypto-assets.” Lack of official comment on this report has added more woes to the crypto investors.
This time their fear has the basis as the Modi government, known for unprecedented decisions, seems all set to surprise the nation with its stand on cryptocurrencies. The government has already shown its love for playing with currency through demonetization of its high value currency notes in 2016. The shock of demonetization is still shaking the financial system like a jelly.
Actually, it has been three years now for the crypto investors fighting for legal backing in the country. Last year, the Supreme Court of India set aside the Reserve Bank of India’s (RBI) order. In 2018, the RBI had directed the banks not to allow anyone dealing in digital assets to operate an account in any bank in the country. The Apex Court’s order encouraged investors, mostly millennial, to board the crypto bus.
In the local (J&K) context, cryptocurrencies are not new mode of investment for the people here. A good number of local investors have been investing and trading in Bitcoin and other cryptocurrencies despite standing advisory from the local police as well asking the general investors not to indulge in trading of such digital currencies.
Remarkably, Jammu and Kashmir police in January 2019 had issued an advisory warning people not to make investments in cryptocurrencies like Bitcoin due to the “heightened risk” associated with them. The advisory stated that the Reserve Bank of India (RBI) has not given any license and authorization to any entity and company to operate in such schemes or deal with Bitcoin or any virtual currency, and such cryptocurrencies do not have any regulatory permission or protection in India.
Despite the advisory, local investors, particularly the young millennials are deeply interested in cryptocurrencies as an investment class. Being very tech-savvy, the young investors value digital assets, like virtual currencies and feel comfortable in dealing with such digital assets. According to a rough data, investors in J&K have parked hundreds of crores in Bitcoin and other such virtual assets.
Now amid reports that government is planning to criminalize the possession, issuance, mining, trading and transfer of cryptocurrencies, the investors have started showing signs of fear and the Bitcoin slumped 10% on Tuesday. It had hit its all-time high of $61,711.87 on Sunday. An unofficial data reveals that despite government threats of a ban, transaction volumes are swelling in India and 8 million investors now hold 100 billion rupees ($1.4 billion) in crypto-investments.
Notably, just a day before, the central bank stuck to its stand over cryptocurrencies and has conveyed to the government its decision to seek a ban on such instruments, having already expressed its serious concerns. It has said that a currency is a sovereign right and cannot be assigned to any individual entity and has also raised security risks linked to cryptocurrencies, saying it could give rise to money laundering and terror financing, because of anonymity of the transactions.
Meanwhile, in the given scary situation, the crypto investors need to observe calm and kill the fear. Besides they should not allow their investment in virtual assets to be guided by greed.
Should investors off load investment in cryptocurrencies? In investment matters, experts always suggest not to do anything as a reaction to any adverse market scenario. It’s just a proposal to ban cryptocurrencies in future. I am sure there would be an option for the existing investors to exit from the crypto market once the ban is approved. If no such proposal is in the recommendations, it’s the responsibility of the government to invoke a provision for an exit plan to ‘declare’ and ‘dispose’ the cryptocurrencies which are currently being held by the crypto investors.
Here huge responsibility lies on the government. Now the clear cut policy on the subject is inevitable and needs to be rolled out immediately. Let the government revisit its rules and regulations around customer verification, anti-money laundering policies, transaction monitoring, taxation rules, and limits on transaction size tom embrace cryptocurrencies. It would be in the fitness of things to encourage investment in this virtual asset through a regulatory route instead of out-rightly banning it.
Lastly, if cryptocurrency defies ban, it would be interesting to watch banks adjusting to the new norm. Let me quote an adage. “Bitcoin will do to banks what email did to the postal industry”.
(The views are of the author & not the institution he works for)