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Amid Crypto Craze, India Needs Sound Policy, Not Brouhaha

Current cryptocurrency valuations are a huge bubble, which will soon burst.

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Every transformative but disruptive innovation creates unprecedented excitement as well as unsettling fear of the unknown for many. The digital revolution sweeping the world is one such epochal transformation taking place globally.

Blockchain-cryptography digital technology, a massively promising and useful but hardly understood tech, which has helped the creation of the cryptocurrencies, is one such spectacular innovation. Use

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A Whole New World

Bitcoin, rolled out as the first digital currency of the world in 2008, was designed to put out of use the fiat currencies issued and managed by the central banks and governments in over 200 countries of the world. Bitcoin, a computer code in essence, stored in the ledgers of its holders, bypasses central banks completely.

As the juggernaut of Bitcoin rolled on globally, Indian policymakers also got worried about the threat to our currency – the Rupee – the Indian payment system in general, the stability of the economic and financial system, taxation and even the integrity of the country itself.

Along with Bitcoin as currency, numerous other innovative products, services and assets have been created on the blockchain-cryptography digital platforms. Ethereum gradually developed into an alternative digital platform. Many other blockchain-crypto platform innovators came out with their services in digital formats.

These platforms riced their services in their own cryptocurrencies and raised their capital in their own cryptocurrencies, though initially subscribed effectively in the central bank currencies only.

Millennials, the first digital generation of the world, took fancy to this new blockchain-crypto ecosystem, loosely bundled as cryptocurrencies.

The crypto enthusiasts saw enormous value being generated by these cryptocurrencies. They started stocking up. A number of crypto exchanges set up shop, including in India, to make money by facilitating acquisition and trading in cryptocurrencies.

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RBI and Government are Worried

India’s Reserve Bank of India (RBI) was rightly worried.

RBI is the monopoly issuer of currencies in India. The reserve money, the currency base, has enormous implications for monetary policy, price stability or inflation, credit growth, financial system stability and financing of the governments.

Currency issuance, if it gets into the hands of any non-official persons, can lead to a bloating of the monetary base and its misuse by terrorists and other undesirable elements. The kind of damage counterfeit Indian currency printed by our neighbouring country did, and the losses it caused to the people in general, could get magnified manifold if private persons or companies were to issue currency. There was huge volatility in the dollar/rupee value of such cryptocurrencies as well.

The RBI began issuing warnings to people in 2013 and did it regularly for years. The government also got worried when stories of gullible people being manipulated to invest in cryptocurrencies reached it and Bitcoin’s value in rupee/dollars rose 20 times in a year in 2017. The government issued warnings, calling the whole thing a Ponzi scheme.

When warnings did not work, the RBI sought to secure the financial system of the country by directing entities regulated by RBI – which pretty much covered the entire financial system as the RBI regulates both the banks and non-banks – in order to keep all cryptocurrency businesses (from mining to trading to investing) out of India’s payment system.

The net effect of this decision was an almost total official ban on the cryptocurrency ecosystem in the country, intended to strike a killer blow to it.

The crypto operators went to Supreme Court. The Supreme Court, partly out of fascination for the new technology but also on account of the absence of any legal framework in the country making dealing in cryptocurrencies unlawful, struck down the RBI notification. This made all cryptocurrencies-related businesses in India fully legitimate.

The RBI had hoped that the government would, while its ban on the use of the payment system worked temporarily, bring a law to ban cryptocurrencies in the country.

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A Complex Concept for Policymakers

The government is struggling to come up with a law to deal with the cryptocurrencies phenomenon. A Committee, headed by then Economic Affairs Secretary, Subhash Garg, in which the RBI and the SEBI were prominently represented, recommended three major policy frameworks.

First, a framework to enable India to proactively introduce a digital version of its currency, the digital Rupee. Second, a ban on private cryptocurrencies as currencies. And, third, to adopt a promotional policy framework to encourage the use of blockchain-crypto digital technology in the financial system. Unfortunately, only the recommendation on banning private cryptocurrencies got the eyeballs prominently.

The report and a draft Bill made crypto businesses and investors quite concerned. Further, the complexity of the cryptocurrency ecosystem, wherein capital, product, service, price and currency, all get rolled into one single phenomenon, ie, its platform cryptocurrency, have proven too arcane for policymakers, technologists and market players to understand, segregate and deal with.

The global cryptocurrency system has grown from $200 billion in 2019, when the Bill prepared by the Committee was released for public debate, to over $3 trillion now. While no authentic numbers are available as no public agency collect this data, millions of Indians have invested billions of dollars in cryptocurrencies.

Crypto exchanges are making so much money that one of the leading crypto exchanges reportedly spent over ₹50 crore on advertisements in the T20 World Cup to woo people to invest in crypto-currencies.

The government could not get its act together after it put out the draft Bill in June 2019. Last year, the Government signalled its intent to introduce the cryptocurrencies Bill in Parliament in the Budget Session. But it could not follow through.

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New Shot Fired on 23 November

On 23 November 2021, the Government again signalled its intent to introduce ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ in the winter session of Parliament.

As intimated by the government to Parliament, the Bill seeks “to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India”. The government seems to have moved only marginally from its position to ban private cryptocurrencies, as the Parliament Bulletin further says that “the Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses”.

There is no more information on the contents of the proposed Bill. Some amendments must have been proposed in the 2019 Bill. The updated Bill has not been discussed by the Cabinet. Nothing has been put out in the public domain. We will have to wait to see the full text of the Bill to make any sense about the direction India is heading in. If cryptocurrencies are a conundrum to many, the manner in which the government intends to deal with this major policy issue is massively opaque and mysterious.

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A Make-or-Break Innovation

The cryptocurrency platforms are creating a lot of utilities like managing music, providing services like decentralised finance, and creating assets like non-fungible tokens. These platforms don’t use data, but programmes, to create services and assets.

Such a digital system is not only far more secure and trustworthy but also highly efficient as it allows relations between different parties to be regulated and executed through self-executing smart contracts.

The blockchain-crypto digital ecosystem is not the same as currencies in this mode. Though the first product of the blockchain-crypto ecosystem started out with Bitcoin as a currency substitute, over the years, other products, services and assets being created on these platforms have become much bigger and valuable. Bitcoin is increasingly diminishing in the overall market capitalisation of crypto products and assets.

As the blockchain-crypto technological platforms create more and more services, utilities and assets, the hype around the system will get normalised. If governments are also able to figure out how to treat this new phenomenon and create appropriate legal and regulatory regimes and the system matures, the ecosystem would become a major contributor in building the digital economy of the world.

This system has enormous potential to build a truly integrated one world, both technically and financially.
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The Bubble is Bound to Burst

Before cryptos become mainstream, quite a few mini and major bubbles would burst.

This unique and versatile nature of blockchain-crypto platforms has caught the imagination of a large number of people, especially millennials. Hoping these platforms create enormous value in future, millions have become avid investors in these different classes of assets.

In their enthusiasm, sometimes bordering on blind faith, they are, however, not bothering to see valuations in the context of any fundamentals.

The start-up ecosystem, which has also caught the fancy of people, has changed the basic parameters of value from multiples of earnings to multiples of sales. The blockchain-crypto ecosystem does not have even the concepts of sales or profit. This has made the valuations on these platforms a matter of blind faith and fancy.

Crypto investors are walking on very thin ice. That is why, whenever there are any unfavourable developments – such as Elon Musk’s tweets, bans by China or the talk of a ban by India – many of these investors tend to press the panic button and turn sellers. The volatility of crypto assets is truly astounding. The cryptic nature of these assets allows many fraudsters and fly-by-night operators to take advantage.

Current crypto-currency valuations are a huge bubble. There is hardly any doubt that this bubble will soon burst.

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Issues the Crypto Bill Must Address

The summary objectives of the Bill as mentioned in the Parliament Bulletin issued on 23 November does not give much idea about the final shape of things to come. When the government says that it would prohibit all private cryptocurrencies minus some exceptions, what does it actually mean?

Will it create a framework to screen private cryptocurrencies to permit trading of some and prohibit others, or will it prohibit all?

Will the use of cryptocurrencies be permitted on their respective platforms, or will the blockchain-crypto platforms also be prohibited from using any private currency, including their own, on their platforms?

How would the government deal with stable coins? What would be the system of an interface between sovereign currency and stable coins?

How soon would the government or the RBI be able to come up with a sovereign digital currency? Will it be retail, wholesale or both? Will the government use a blockchain-crypto format for the sovereign digital currency, or a dematerialised currency format that has been used quite successful in equity, bonds and other financial assets?

The answer to these questions would decide whether India seizes or loses the blockchain-crypto technology revolution moment.

It will also determine whether the current brouhaha will pave the way for India’s prosperity, or whether it will lose out on the next game-changing technology, as it did with technology from the industrial revolution, leaving millions with immediate and long-term pain.

(The author is an economy, financial and fiscal policy strategist and former Finance Secretary of the Government of India. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)

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