Better Safe Than Sorry

Context: ‘Cryptocurrencies might turn out to be nothing more than sophisticated and convoluted pyramid schemes that one day result in significant economic pain for cryptocurrency enthusiasts. 

Challenges associated with Cryptocurrencies

• Threat to ‘macroeconomic and financial stability’:
  • Unlike blockchain that can be used for economic progress and for mining cryptos. Cryptos pose a serious threat to financial and macroeconomic stability like
  • If cryptos are seen as an alternative to bank deposits and banks lose deposits, their ability to create credit gets constrained. 
  • This has grave implications, both for the ability of monetary policy to influence interest rates, and for economic growth in a bankdriven economy like ours already struggling with low credit offtake.
• Volatile nature of cryptocurrency: Their value fluctuates wildly Eg. The value of Bitcoin,fluctuated from about $7,000 in 2018 to close to $70,000 more recently.
• Risk of cyberattacks and frauds:  whereby millions could stand to lose their hard-earned money.
• Serious implications for capital flows and for energy consumption: when ‘mining’ activity migrate to emerging market economies.
• Natural demand and supply for conversions can easily become unbalance: As increased demand for crypto assets could facilitate capital outflows that affect the foreign exchange market..
• Regulatory issues: Regulation will not be easy, given the size of the market and unorganised culture.
  • Restrictions on crypto trading could trigger new leakages as trading moves away from exchanges to peer-to-peer and other less formal or visible channels (e.g., chat rooms).
• Disproportionate impact on gullible and vulnerable investors (and economies): Due to sophisticated nature of cryptocurrency.

Way forward: 

• India specific policy response: Go slow on capital account convertibility, and needs for  an unstable forex market
  • Policymakers should focus on balancing ‘enabling financial innovation and the commitment to open, free and contestable markets, against challenges to financial integrity, consumer protection and financial stability’.
• Investor education: As according to Nasscom, size of the crypto market is expected to grow to $241 million (?1,795 crore) in India and to $2.3 billion (?17,128 crore) worldwide by 2026
  • Financial literacy initiatives must be launched on a war footing, and cryptos must be called out for what they are: speculative assets.
• Strict enforcement of Advertising Standards Council of India’s  guidelines against misleading ads.
  • Clearly readable disclaimers, as in the case of investments in mutual funds, must be carried along with all ads for cryptos.
• RBI must expedite its own central bank digital currency (CBDC): CBDCs have some advantages over the present paper form, they will obviate the need to hold other digital asset.

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