The ‘Crypto-token Regulation Bill of 2018’ mooted a complete ban on virtual currencies. However, following intense lobbying by industry stakeholders, the bill was dropped. Instead, the RBI in April 2018 instructed banks to stop dealing in, or providing services for dealing with, virtual currencies. The order was challenged by the Internet and Mobile Association of India, representing various cryptocurrency exchanges which argued that since there was no law banning cryptocurrencies, the RBI could not stop banks from dealing with it.
In March 2020, the Supreme Court set aside the RBI circular of April 2018 prohibiting banks from providing services in relation to virtual currencies. It effectively said that it is Parliament, not RBI, that must enact laws. The GoI promised to act, but has not, despite the high-level inter-ministerial committee submitting its report in March 2021. A bill may be tabled in this session of Parliament, but is unlikely to be passed. Meanwhile, cryptocurrency trade is booming, with crypto exchanges claiming 20 million new investors.
The IMF in its Global Financial Report 2021 in October warned that “tougher regulation is needed to prevent rapid growth in cryptocurrencies leading to financial instability, defrauding of consumers and the funding of terrorism.” Citing several high-profile cases of hacking-related thefts of customer funds, it cited that a huge surge of speculative interest had seen a large quantity of money -- estimated to be $2 trillion -- flowing out from the formal economy to the unregulated sector.
The US Federal Trade Commission reported a sharp spike in cryptocurrency scams since October 2020. In November 2021, investors lost millions in the Squid coin scam based on Netflix’s popular show ‘Squid Game’ as the coin’s value crashed from $2,870 to zero overnight as the founders fled with the money. In India, crypto exchanges used high-pitch celebrity endorsements to create investor frenzy. The RBI Governor recently warned investors about the inherent dangers of investing in cryptocurrencies and the dangers they pose to the financial system.
There are five major dangers. It is easy to launder money with cryptocurrencies -- much easier than routing it to a tax haven. It is also easy to bring in money quickly from unknown destinations and fund drug, terror contracts or arms supplies with unregulated tokens. Cryptocurrencies are the favoured currency in the Dark Net and are extensively used for ransomware. It is impossible to provide investor security in unregulated currencies, and currency frauds, exchange frauds and wallet frauds are rampant. And finally, if people start investing in cryptocurrencies to beat inflation, it will hurt bank and treasury deposits.
The RBI has neither the data nor the technology to regulate cryptocurrencies. Cryptocurrency variables are far too many and geographies and applications cannot be restricted or bound in a framework. Though only a few dozen tokens are actively traded, there are over 5,000 cryptocurrencies and most of them permit anonymity, where no tracking is possible of either the flow or the use of money. In 2017, JP Morgan boss Jamie Dimon called Bitcoin a fraud, but it still found millions of investors and rose from $2,000 to $60,000 in a five-year period. As there was no way they could stop it, US regulators decided to let it trade like a commodity.
Most Western nations with convertible currencies permit the trading of cryptocurrencies in some form. China and Russia do not. This is because a lot of wealth from the BRIC nations is laundered through cryptocurrencies. The UK, France and the US benefit most from laundered money, whether it is from Muammar Gaddafi or Vijay Mallya.
Speaking at the Summit for Democracy, Treasury Secretary Janet Yellen said “There’s a good argument that, right now, the best place to hide and launder ill-gotten wealth is actually the US.” Because India’s currency is not fully convertible, the rich do not consider it an ideal destination for parking money. Interestingly, China and Russia permit Bitcoin mining but ban its use. But that is possible only in closely controlled economies.
There is no way you can ban cryptocurrencies effectively in democracies. The RBI’s proposed digital currency is not a substitute for cryptocurrencies. It would be open to fraud and cybersecurity/hacking threats. Private cryptos are encrypted and unregulated. A Financial Transaction Tax (FTT) of 0.01% can perhaps track crypto investments for a preliminary database.
By that time, we can make the Rupee fully convertible so that it becomes more stable and acceptable to foreign investors. That is the first step to liberalising the currency. Till then, the government can make the buying and selling of unregulated cryptocurrencies difficult, cut them off from direct bank transfers and loan funding as the RBI had done before. The government can also slow down cryptocurrency proliferation by stopping their ads and promotion.
(The writer is a journalist and author of 3 books on economic governance)