Context: Crypto mania is a symptom more than a cause.
Issues with Cryptocurrency
Delusion that crypto is conjured out of thin air: It actually requires substantial material infrastructure, which a state could always control. States can shut down mining as China has done.
Money is subject to politics: It allows a modicum of collective control over future, and allows distributive questions to be posed.
Crypto revolution has not been met even on their own terms: It cannot boast the blend of stability, efficiency, privacy and safety that would allow it to dominate central bank money.
Revolution heralded by digitisation will continue in different forms, ironically facilitating more centralised and hierarchical monetary architectures.
Ideological claims of crypto have been deflated: It is now considered more likely an asset. Some financial products bring genuine gains for the economy or development, others pose a risk.
Risk of crypto is purely private: If people want to speculate so be it. There are issues about fraud.
Insulation of crypto markets will be difficult to achieve: RBI should have been more aggressive in discouraging the growth of this industry.
Facing lobbying by investors as an interest group: It is difficult to pretend that a major new class of assets, especially if volumes grow, does not have systemic effects on the rest of the economy.
RBI’s case would be strengthened if it spelled out the systemic risks that crypto might pose to the stability of the real economy.
Not fully banning and allowing it offshore will be the worst of both worlds.
Way Forward:
RBI should avoid a scenario where it bans but then carves out exceptions.
If it somehow allows Indians to invest then it has to ensure that trade does not go offshore.
Financial system should be in the service of the real economy.