What is a good policy for cryptocurrency from an Indian perspective? To answer this, one needs to ask oneself the following questions. First, what are some unique characteristics of crypto and what do these enable investors, central banks, businesses and governments to do? What is the policy goal for crypto? And finally, who should “control” and regulate crypto?

We know that Bitcoin, the first blockchain-based cryptocurrency, is based on a distributed digital ledger that enable immutable, irreversible, transparent transactions that can be checked and verified with no central or third party oversight. Obviating the need for a fiat currency.

The original crypto, Bitcoin (or BTC), has by design, a limited number that can ever exist. There are 21 million BTCs, but as of date 18.68 million has been mined. Global holding of different cryptocurrencies is now valued at around $1.5 trillion, that is after a trillion dollar liquidations in recent weeks. Some 100 million investors, of which approximately 75 per cent are retail investors, defines the current cryptocurrency community. The community creates a floor price, which is “Energy Value”, that goes higher with years and the price band of accumulation by the community. In the case of BTC, one believes a lot of pyramiding was done between $8,000 and $15,000. The back-end infrastructure on which they operate is concerning. Some of the power guzzling mining farms in interior Mongolia, which look like metal warehouses from the outside, are in complete contrast to how super computers are maintained.

They are all generally working on a low cost structure and throwing parties for the communities with cryptos. It may be argued that cryptos are today the nearest to a global virtual casino. If lucky, enter, make quick bucks and dump, just as Elon Musk famously did and in a way proved the point.

It must not come as a surprise if BTC crosses $100,000 despite the recent crash. As it does, the community gets bigger, and possibly stronger too, and one is likely to see the growth of more interoperable coins than new cryptos, thereby adding a layer of complexity to transaction trails. And all of these have nothing to do with inflation hedge, not to forget the Hunt Brothers episode on how they cornered the silver markets. At a time when decentralised finance — a blockchain based form of finance utilising smart contracts, most commonly in the form of Ethereum — is gaining momentum, it is time for our policymakers to take stock of the crypto market for necessary regulation. Also, they must assess how cryptos add value to the economy; not to forget, it involves conversion of the rupee to an unregulated asset.

Recent market gyrations have also become a cause of concern for governments and central banks. Cryptos in current form are neither equivalent to gold nor a competition to fiat money.

It may well be a well-designed global virtual casino. The Central Bank Digital Currencies (CBDCs) are seen as a response to these privately floated cryptos, although CBDCs will function centralised. While unofficial estimates peg that Indian investors hold around $1.5 billion worth digital currencies, it is yet unclear as to how in the new framework these investors would exit and how the retrospective declarations would be sought from them and the traders.

Leaning towards banning

The approach of the RBI and the Inter-Ministerial Committee (IMC) set up in November 2017 has leaned towards banning any activity related to cryptocurrencies. That said, the draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 has not materialised into legislation yet, surprisingly.

A key concern for the government and regulators are the risk of money laundering, terror financing and hacking. They know that even in the world of hard cash or electronic money, the money trail gets lost in a complex maze of holdings and shell entities. In the crypto era, this may become even more complicated unless there is an acceptable regulatory “certainty” in this domain.

In transactions using cryptocurrency, the apprehension that tainted funds are apparently mixed with the other funds in the “tumblers”, making it lot more difficult to get to the source and then shut the account down, deserves attention. That said, all it takes is a one unique ID to connect the dots, which hasn’t been possible earlier.

Cryptocurrencies, in one form or another, will play a crucial role in shaping the future of our financial systems. A few nations banning cryptos will be akin to making cocaine illegal while it is legal in the neighbourhood.

There should be a global consultative approach on cryptos with country-specific regulations. The good news is that in the financial sector this has begun to happen, first through FATF (Financial Action Task Force), and now through the proposal for a global taxation for MNCs; hopefully, cryptos will be next.

Cryptocurrency has helped seed ideas of a big new world for Non Fungible Token (NFTs) and and CBDC. The CBDC should help advance the work related to financial inclusion and cost related to transfer of funds in a border-less world. For investors, there is is no dearth of products to hedge against inflation or currency depreciation; they shouldn’t fall for framing.

Sahay is Chairman, and Nambiath is Head, India Gold Policy Centre at IIM A

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