Debashis Acharya
Investment in cryptocurrencies has exponentially grown in recent times. Globally speaking, at the end of Q1 2021, the crypto market capitalisation was $1.9 trillion. Compared to the Q1 of 2020, the market witnessed massive growth in market capitalisation (+146% vs -8%) and trading volume (+155% vs +48%), as presented in Coingecko’s Q1-21 report. The Indian cryptomarket has equally grown. Unocoin launched its exchange in 2013, followed by Zebpay in 2015, CoinDCX and Wazirx in 2018 and Coinswitch KUBER in 2020. The number of users in a typical exchange ranges between 2-13 lakhs. The exchanges are trying to lure potential customer-investors to buy coins for as small as `100. It’s the fungibility that is marketed to the common man.
The other incentives offered to attract investors include zero fees and no lock-in period. Indians have started parking relatively more money in equities and mutual funds these days compared to earlier times. The recent data on household financial assets and liabilities show household net financial assets at 21% of GDP in Q1 of 2020-21 compared to 4% in Q1 of 2019-20. A recent Livemint report says that Sensex has given 44.76% one-year returns to an Indian investor whereas fixed deposits, liquid funds and gold have yielded 4.9%, 3.15% and -13.04% respectively. In contrast, as on August 26 Bitcoin has witnessed more than 300% increase in its price over one year, reports CoinGecko.
Moreover, the pandemic-driven low-interest regime has also contributed to a booming stock market and investment in cryptos. Increased retail participation in stock markets speaks of increased awareness about stocks and near-stocks like cryptocurrencies during the pandemic. It is also not surprising for the average Indian investor to be lured by crypto exchanges’ advertisements. But the return on these virtual coins has witnessed very high volatility implying the inherent risk in such coin investments. How justified is this cryptomania despite regulatory uncertainties? The Indian exchanges have been struggling with regulatory uncertainty since April 6, 2018, the day RBI prohibited all commercial and cooperative banks, payments banks, small finance banks, NBFCs, and payment system providers from dealing in virtual currencies. This was followed by the monetary policy press conference saying, “currency issuance is a sovereign function, and a private currency cannot overwrite what is in the sovereign domain.” The government of India, in its 2018-19 Budget, had declared to take all measures against cryptocurrencies since they were not legal tender. But in March 2020, the Supreme Court set aside the RBI Circular on Prohibition on Dealing in Virtual Currencies on the ground of proportionality, giving some relief to the market. One of the RBI papers in 2020 identifies “Cryptocurrencies as one of the business models of the Indian Fintechs and as one of the forces of creative disruption. This business model deals with bitcoin and other digital currency products and services with 342 firms engaged in this business.” So, for RBI it’s a transition from cognisance to confusion on regulating cryptocurrencies. After the apex court’s verdict, the trading of cryptocurrencies in Indian exchanges picked up again. Further, the RBI booklet, “Payments and settlement systems in India, 2010-20” has been apprehensive about risks associated with cryptocurrency with discussion on the possibility of introducing a digital version of the fiat currency — the Central Bank Digital Currency (CBDC). The Lok Sabha Bulletin, Part II (no. 1989-2025) has listed a bill, “to create a facilitative framework for the creation of the official digital currency to be issued by the RBI and also to prohibit all private cryptocurrencies in India.”
The critical concern of RBI has been to protect the ordinary investors and not to allow private currencies to take over sovereign functions. Despite the Supreme Court’s verdict and high trading volumes, the government has been moving toward some regulation of these currencies. The reasons could be the following. First, both the government and the RBI do not want crypto-like private virtual currencies to interfere with the sovereign function of currency issuance. Secondly, our tax laws do not contain any provision to capture the use of cryptocurrencies. In the absence of accurate data on crypto usage it is difficult to design taxes. The crypto exchanges suggested taxing crypto transactions instead of entirely banning them. Thirdly, the government has been apprehensive about illegal transactions and money-laundering with such coins’ use. Finally, keeping aside the possible benefits of the blockchain technology underlying cryptocurrencies often debated in the public domain, its volatility is a potential threat to financial stability. But a recent statement by the Union Finance Minister in the India Today Conclave South held during March 12-13, 2021 indicated the possibility of the government allowing a certain amount of window for people to experiment on blockchain and bitcoin, not entirely shutting off crypto related activities. Soon after this WazirX, CoinDCX and CoinSwitch Kuber, crashed May 19, 2021. Paytm did stop its banking support to crypto exchanges May 22, 2021.
What could be the future of cryptocurrencies in India amid such uncertainty in the market and without any clarity by the regulator? First, there may not be a blanket ban on cryptocurrencies so that the underlying technology is encouraged. These currencies are expected to be traded as any other ‘high risk’ assets. Secondly, the regulation may call for necessary changes in the Income Tax provisions to tax a limited set of transactions as the government may deem fit. Third, the RBI may issue CBDC as legal tender. But CBDC won’t serve the purpose of those investing in cryptocurrencies. The CBDC and private virtual currencies are different though both may function using distributed ledger technology. The former is legal tender, whereas the latter are decentralised, well beyond the control of any central bank. Let us hope the regulation in the offing will clear the dust soon.
The writer is Professor, School of Economics, University of Hyderabad.