With the presentation of the 2022 Union Budget on the first day of February this year, Finance Minister Nirmala Sitharaman finally threw some light on the direction that the government would take on cryptocurrencies. The decision to impose a 30% tax on converting crypto assets plus the imposition of a 1% transaction charge has drawn a lot of ire from the startup ecosystem, which has been rattled by the decision to disallow setting off crypto losses against other assets. But looking at the decision in the cold light of objectivity, what appears is that the government has taken a milder policy direction than what it should have taken.
There Are Many Issues at Hand
Meanwhile, 17 days later, the RBI governor, Shaktikanta Das, in his monetary policy announcement, for the first time directly warned investors that they would be investing in cryptocurrencies at their own risk as they had no underlying asset – ‘not even a tulip’.
He reiterated the RBI position for the last couple of years that private cryptocurrencies were a big threat to financial and macroeconomic stability and that they would undermine the RBI’s ability to deal with issues related to financial stability.
Clearly, both these positions indicate that a clear coherent policy strategy of the cryptocurrency scenario, or the virtual digital currency ecosystem, is a work-in-progress. And that’s not because the government doesn’t want to create a sound policy, but because the actual encapsulation requires factoring in many issues at hand.
The Vigorous Messaging Around Crypto
The last year has seen a burgeoning of crypto exchanges in the country, and if one was to go by commercials that were unleashed during the last IPL season, the road to wealth for the common man was through investment in crypto. The accompanying messaging focused on the deep proliferation of crypto in the country, with ‘experts’ estimating that almost 100 million individuals owned some or the other form of crypto. The message that was being propagated was that banning crypto would hurt a lot of people and that the spread of digital currency was inevitable and could not be stopped via fiat.
The government had planned on the introduction of a Bill in the winter session of Parliament for the regulation of cryptocurrencies. But it was put off as the government did not want to be seen as ‘anti-technology’. The Bill had proposed legitimising crypto assets to promote blockchain but also putting a stop to crypto as a medium of exchange.
This line of thought is full of lacunae. Crypto, unlike other assets like land and jewellery, is not just divisible and mobile but also easy to exchange. Add the devastating element of anonymity, and we are left with an entity that can be used for a wide range of illegal activities, including terror funding.
Also, crypto is not the only by-product of blockchain technology, as the decentralised network can be used over a gamut of activities like communication and security.
And even more importantly, it is inconceivable that crypto can be used in the same fashion as other assets, say, for mortgage. No financial institution would lend against an asset that has the kind of volatility that crypto has.
A Speculative Asset
The bigger problem with crypto is that it does not have a fundamental value as it is not backed by any sovereign body or institution, thus leaving no room for restitution. Crypto is primarily a speculative asset with no underlying value, and that raises the spectre of a bubble that can burst any time. The problem is that unlike other assets that promote speculation, say, stocks, crypto does not have a regulatory body that protects the interests of the common user. Nor is it possible to have a regulatory body given the decentralised nature of the blockchain.
The last year has seen severe fluctuations in the price of all major cryptocurrencies, and the movement has been on both ends. The kind of price movement is reminiscent of the great ‘Tulip Mania’, and we all know how that ended. The fact is that the day crypto goes bust, many players would be left holding the bucket. The government’s decision has to be seen in the light of this possibility, as it is important to discourage people from investing in crypto assets, if not have an outright ban.
The Govt Has Walked a Fine Line
The RBI is also coming out with its own version of a digital currency, which might be a lot like a digital wallet that China has introduced. Though the final details are not known, RBI has indicated that the digital rupee will be like the paper rupee and the form will be electronic or digital and will be stored in one’s cellphone with 1-to-1 convertibility. Since this digital currency would be centrally controlled by the apex bank, it would be interesting to see how they use blockchain in its architecture, given the decentralised nature of the blockchain. Whether such a digital currency will be prone to similar volatility and be ripe for speculation is also something that we will have to see in the coming days.
Amid the risks posed by the proliferation of cryptocurrencies, one can only applaud the decision of the government, which has walked a fine line without actually banning crypto transactions.
A harsher but practical move would be to bring crypto exchanges under the ambit of the Goods & Services Tax (GST) and impose a sin tax of 28% on all crypto transactions to deter people from investing. In the meanwhile, let us wait and see if a modified crypto regulatory Bill comes out soon to throw some sense into the tumultuous world of virtual digital currencies.
(Subimal Bhattacharjee is a commentator on cyber and security issues around northeast India. He can be reached @subimal on Twitter. 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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