Explained: Is RBI Governor’s concern about cryptocurrencies justified?

3 months ago 9

Reserve Bank of India (RBI) Governor Shaktikanta Das recently expressed concern about the use of cryptocurrencies. The central bank governor’s comment comes at a time when the value of Bitcoin, the highest-valued cryptocurrency, has crossed $50,000.

On Wednesday, Shaktikanta Das said cryptocurrencies could have an adverse effect on financial stability, thus impacting the economy. Das added that the RBI has “major concerns about cryptocurrencies” during an interview with CNBC-TV18.

“We have communicated them to the government. It is under consideration in the government and I do expect and I think sooner or later the government will take a call and if required Parliament also will consider and decide," he was quoted as saying in the interview.

While Das did not elaborate further, the Indian government has on many occasions in the past expressed concern about digital currencies, claiming they can be used to launder large quantities of money and for terror funding purposes.

Read | Is India going to ban Bitcoin? Here is story so far

But is the concern justified? Let’s start off with a short recap.

The RBI had initially banned banks and financial entities under its jurisdiction from providing services to businesses dealing or trading in cryptocurrencies in April 2018. It was claimed that these digital currencies were being used for fraudulent activities. Interestingly, the circular came just a year after Bitcoin gained popularity among traders in India.

The top bank’s circular was subsequently challenged in the Supreme Court by several crypto-trading agencies in the country. The RBI circular was struck down, but only for entities or businesses operating in cryptocurrencies. It was a landmark decision for cryptocurrency exchanges in India.

The top court said in its observation that the RBI circular created a disconnect between the banking sector and cryptocurrency exchanges. The SC also noted that RBI had not found any concrete evidence regarding the functioning of these crypto exchanges.

The judgement did provide relief, but several cryptocurrency exchanges have called for better regulation of digital currency trade to fix current issues.

Now, the government is planning to introduce a bill — Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 — in Parliament to ban companies and individuals from trading in cryptocurrencies. It is also expected to create a framework for an official digital currency for India.

Cryto trade back in focus

Prominent cryptocurrency trading exchanges in the country have seen a sharp rise in the number of users; their trading volumes have also seen healthy growth. For most parts of pandemic-ravaged 2020, traditional investment avenues took a big hit and affected several investors.

At the same time, cryptocurrencies including the likes of Bitcoin started gaining popularity after a complete collapse a couple of years ago. Bitcoin has performed exceptionally over the last year, gaining as much as 700 per cent. It is currently trading at over Rs 36 lakh per coin or over $50,000.

Over the past year, Bitcoin and some other cryptocurrencies have witnessed a sharp rise in valuation due to higher investments and interest among new-age traders across the globe. Many high-value investors have also joined the cryptocurrency race and invested in what has been termed as the “future of currency” by digital currency backers.

Read | Explained: Reason behind Bitcoin’s meteoric rise in 2020

Advantages of cryptocurrency trade

Experts say that the good part about cryptocurrencies is that they have the potential to hedge against inflation. Unlike traditional currencies, the value of cryptocurrencies depends on demand and is not affected by inflation-driven currency fluctuations. For instance, there are only a finite amount of Bitcoins in the world and value goes up only when demand rises.

Cryptocurrency investors say that it is more secure than traditional forms of investment and offer better privacy to the investor. Major cryptocurrency exchanges in India have made this point several times. And the monetary gains after investment have been better than decent, at least for the last 10-12 months.

These may be strong reasons to support cryptocurrencies, but there are several disadvantages as well.

Drawbacks

Governments around the world see cryptocurrencies with suspicion and all of them have the same apprehension — that they can be used for illegal transactions and could ultimately become a dangerous weapon in the hands of terrorists and other nefarious organisations.

At the moment, it is not possible for governments to monitor crypto trade activity due to the high security and privacy offered by digital currencies. Meanwhile, a report on The New York Times, written approximately a month before the fresh Bitcoin rally, suggested how criminals love to use Bitcoin.

Some experts say that the lack of regulation of cryptocurrencies is its biggest disadvantage, exposing it to illegal use by some people or groups.

Another major disadvantage of cryptocurrencies is that their value can as fast as they rise. Fluctuations are pretty common during trade and there is no security in terms of stability. Most seasoned crypto traders warn that people should be "prepared" to deal will sharp corrections before entering the cryptocurrency market.

Simply put, the digital currency market still suffers from very high levels of volatility. This could be a reason why the RBI governor said it could impact financial stability, especially if larger entities in the country start investing.

Another major disadvantage is that cryptocurrencies are still not accepted in most countries; only a few have legalised them.

These are some of the reasons why most traditional investors would think twice before joining the so-called 'millennial' investment trend.

Conclusion

Considering all the facts mentioned above, RBI Governor Shaktikanta’s concern regarding the financial stability of cryptocurrencies cannot be ruled out, given its volatile nature. But at the same time, backers of these digital currencies say most issues can be fixed if governments around the world regulate cryptocurrency trade.

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