On May 31, minutes after the clarification from the Reserve Bank of India (RBI) on the 2018 circular on virtual currencies came, the pro-crypto lobby had jumped in to interpret the statement as the central bank’s changing stance in favour of a cryptocurrency market in India. Every company’s statements were issued by every company associated with the crypto industry, welcoming the central bank’s move. These statements confused many.
Reason: The RBI had only clarified that its 2018 circular is invalid post the March 2020 order of the Supreme Court. The central bank never spoke in favour of cryptocurrency. On the contrary, it clearly cautioned banks while dealing with these instruments, asking them to follow due processes citing various legal issues. Yet, the crypto industry wasted no time spinning it in their favour. It was termed as RBI’s major rethinking on crypto. A senior official of a private bank even issued a formal statement describing how “RBI allowing virtual currency” is a step in the right direction. Such misinterpretations led to even more confusion.
Today (4 June), at the post monetary policy presser, RBI Governor Shaktikanta Das has put all such speculations at rest concerning the RBI stance on crypto and, that too, in a decisive manner. The Governor, replying to a question, clearly said the central bank has major concerns on cryptocurrency, and the Mint Road have conveyed these concerns to the government. “There is no change in RBI’s position (concerning cryptocurrencies). About advice to investors, well, central banks don’t give any investment advice. It’s up to each investor to make his own appraisal, to do his own due diligence and take a cautious call about his own investments,” the Governor said.
This statement leaves no room for anyone to speculate. The RBI doesn’t endorse cryptocurrency.
In fact, the RBI’s thinking on this issue was clear from the 2018 circular (which was set aside by the SC in March 2020) itself. In 2018, the RBI had said given the associated risks, RBI-regulated entities should not deal in virtual currencies (VCs) or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/ sale of VCs the RBI said then.
Further, the regulated entities which already provide such services shall exit the relationship within three months from the date of this circular, the RBI said. The question of May 31 clarification arose only because of the March 2020 SC order. The central bank didn’t want to walk into an embarrassing situation to attract the contempt of court proceedings from the SC. There was nothing one could read in the May 31 RBI clarification beyond that.
Why does the central bank doesn’t like Crypto? The answer for that lies in the three major issues that experts have cited all along. There is no underlying asset for cryptos, these aren’t regulated centrally, and the instrument carries high volatility. For a financial system, these are serious risks. According to Madan Sabnavis, chief economist of the CARE rating agency, dealing in crypto is akin to gambling and, hence, needs to be banned till regulatory clarity emerges.
The RBI’s message today is obvious. The central bank doesn’t want to be seen as endorsing crypto. And investors, if they wish to, will have to deal in these instruments at their own risk. But here is the problem. Logically, something the central bank doesn’t endorse and has “major concerns” about will not be a safe business proposition for any regulated entity that operates under the RBI. If something goes wrong, banks will not have the backing of the regulator. No serious banker will indulge in such an asset willingly.
This isn’t the first time Das making his view clear on cryptocurrencies. On March 25, speaking at the 7th edition of the India Economic Conclave, Das said the central bank had flagged some major concerns to the Government about cryptocurrencies. “Both RBI and the government are committed to financial stability. We have flagged some major concerns to the government on cryptocurrencies. The government will come out with a decision sooner than later,” Das had said.
The government’s stance on this issue is also not clear. The government has proposed to present a bill to regulate cryptocurrencies called The Cryptocurrency and Regulation of Official digital currency Bill, 2021. The Bill has provisions to make any dealings in cryptocurrency illegal. But there is no clarity yet on when this Bill will be introduced in Parliament.
What is clear now is this: RBI’s repeated caution and reiteration that the central bank has major concerns on cryptocurrencies are a strong message to common investors looking at crypto as an asset about the high risk involved in the absence of clear regulations. Investors should take serious note of Das’ caution.