The government must identify the risks and define a regulatory framework for cryptocurrencies that addresses them

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RBI Governor Shaktikanta Das reiterated his cryptocurrency concerns on Tuesday. Speaking at the SBI Banking Conclave, he said “there are serious concerns about macroeconomic and financial stability”. The governor’s comments come days after a meeting chaired by the prime minister reportedly reached a consensus that the government’s actions in the cryptocurrency arena should be “progressive and forward-looking.” While the central bank is right to advise caution, an outright ban, even if it is enforceable, is not a prudent way forward. Given the nature of cryptocurrencies, restrictions on these transactions can end up having the opposite effect, pushing them beyond the realm of scrutiny and making it more difficult for law enforcement in the event of a crime.

Overall, there does not appear to be uniformity in the regulatory approach towards cryptocurrencies. Countries grapple with questions about the appropriate regulatory framework and choose different approaches. For example, on the one hand, El Salvador allowed Bitcoin as legal tender, while on the other hand, China imposed a blanket ban on all crypto transactions and mining. In India, the RBI had banned all banks from dealing in cryptocurrencies in 2018, but this was overturned by the Supreme Court in 2020. However, while the central bank has expressed concerns, the underlying blockchain technology finds support. It all depends on how a country views cryptocurrency – as a currency, an asset or a commodity? How it is classified will in turn determine the regulatory architecture, and hence the tax treatment. There are indications that the Indian government is likely to introduce a cryptocurrency bill during the winter session of Parliament. Reports also suggest that the government may classify crypto exchanges as e-commerce platforms. But it would also raise questions about who would be the appropriate regulator.

There are legitimate concerns about cryptocurrencies. They arise from the fact that there is no underlying asset, no benchmark to value their values. In addition, they are extremely volatile in nature. Given the dramatic increase in investor interest in these currencies – non-fungible tokens are gaining in popularity – investor protection concerns must also be taken into account. While savvy investors may not need the advice, retail investors – according to the RBI Governor 80% of crypto accounts are small accounts of Rs 1,000 and Rs 2,000 – should be brought into play. guard against cryptocurrencies and the volatility associated with them. The problems of money laundering and terrorist financing must be tackled. In view of this, a regulatory framework urgently needs to be developed. The device will have to handle a myriad of aspects of cryptocurrencies – selling, buying as well as intermediaries such as exchanges and trading platforms. The government would do well to act with caution. It must identify the associated risks and create the regulatory architecture to deal with them.

This editorial first appeared in the print edition on November 18, 2021 under the title “Crypto opportunité”.

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