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VIEW: RBI concerns on bitcoin valid, but official cryptocurrency a silly idea

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Blockchain technology indeed is the centerpiece of bitcoin which means it is anonymous, and without a body to kick or soul to damn. It is for the RBI to ponder how it would straddle both the worlds---rupee within its oversight and the digital rupee eluding its oversight.

VIEW: RBI concerns on bitcoin valid, but official cryptocurrency a silly idea
With the legislation on regulating shelved for the winter session of the Parliament, speculation is rife on the contours of the future status of the cryptocurrencies’ ecosystem in India. The RBI governor has made it amply clear that allowing private cryptocurrencies (hereinafter referred to as bitcoin both in the metaphorical sense as well as in the real sense depending on the context) is fraught and hence they need to be banned.
At the same time, it avers, the demand for cryptocurrency should be catered to, and not stifled, with an official or sovereign cryptocurrency. The sovereign bitcoin has been work-in-progress for more than a year now, testifying to its oddity.
RBI had in 2018 banned private cryptocurrencies including bitcoin which ban was revoked by the Apex Court. Thereafter a chastened RBI took a nuanced stand that it has no objection to people investing in bitcoins but it would not enjoy legal-tender status. Indeed only El Salvador has granted bitcoin the legal tender status alongside the US dollar which it has adopted as its domestic currency. Elon Musk tested waters by mooting the idea of Tesla accepting bitcoins for its cars but quickly backed out sensing opposition from Federal Reserve and tax authorities in the US.
It is not as if the RBI was only at odds with the Supreme Court. It has also been at loggerheads with the government which says strong regulations rather than a peremptory ban is the way forward. In other words, the government worldview squares with the Apex Court view on the matter. RBI is now back to its old stand---ban private bitcoins.
The RBI has repeatedly reiterated its strong views against cryptocurrencies since it gained popularity in India following a sudden boom in Bitcoin prices. The central bank’s argument is it poses serious threats to the macroeconomic and financial stability of the country. The RBI also doubted the number of investors trading on them as well their claimed market value.
On November 10, 2021 its governor had reiterated his views against allowing bitcoins saying they are a serious threat to any financial system since they are unregulated by central banks and also could undermine the Indian rupee. If a large number of investors invest in digital coins rather than rupee-based savings like provident fund, the demand of the latter will fall. This will hamper the ability of banks to lend out money to its customers. Moreover, since cryptocurrencies are unregulated in the country and are difficult to trace, the government will also not be able to tax them. On top of that, they can be used in money laundering and illegal activities. Crypto investors, for all these reasons, are in turn susceptible to hacking, scams, and losses as crypto coins are volatile in nature. This is the long and short of RBI’s concern.
RBI’s apprehensions are not far-fetched or exaggerated. It is true that bitcoin’s stratospheric valuations are entirely due to scarcity---only 21 million coins can be mined out of which 18.77 million have already been mined as of August 2021. There is no one to underwrite it except by the blockchain technology. While blockchain technology makes hacking and faking difficult, that is not the same as a central bank sanctifying it.
That said, it is curious that it is heel-bent on offering an official or sovereign cryptocurrency as if to mollify those who have been stopped from savoring the forbidden fruit though it must be conceded that RBI is not alone in this seeming contradiction what with 80 percent of central banks around the world working on creating a digital currency and 90 percent of them being in emerging markets.
China in January 2021 launched its official bitcoin Digital Currency Electronic Payment (DCEP) that is based on blockchain technology and designed to strengthen its currency Yuan.
Blockchain technology indeed is the centerpiece of bitcoin which means it is anonymous, intangible, faceless and without a body to kick or soul to damn. It exists only on the virtual world and hence is immune from manipulation in view of all transactions being routed through its distributed ledger but it is this faceless character of bitcoins both private and sovereign that makes them immune from regulations as well. It is for the RBI to ponder how it would straddle both the worlds---INR within its oversight and the digital rupee eluding its oversight. RBI is worried about private bitcoins undermining the INR. It should be equally worried about its own official bitcoin undermining the INR.
More importantly it should ponder what purpose it is going to serve apart from its novelty that normally wears off quickly. Private bitcoins are traded in the bourses. Will the digital INR be traded in Indian financial exchanges? If they would be, won’t it undermine the INR regulated by the RBI?
RBI should not do anything that would confuse the people which a hermaphrodite currency can especially in a country where financial illiteracy is rampant. The government and the Apex Court are right---let private bitcoins be an investment avenue for those interested as is the case now. However, an education campaign should be launched to disabuse the notion that they are legal tender. The USA wisely taxes capital gains from bitcoins at a higher rate. We too must.
— S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
Read his other columns here
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