In an address to an awards ceremony held by Indian Banking Association, Deputy Governor of the Reserve Bank of India, T Rabi Sankar, equated cryptocurrencies to a Ponzi scheme and called on banning them to be an advisable solution.
In his speech titled 'Cryptocurrencies – An assessment', he gave an overview of cryptocurrencies, and assessing them while giving their plausibility of regulation in India.
"Cryptocurrencies are very much like a speculative or gambling contract working like a Ponzi scheme", the transcript of his speech says, citing the example of exhorbitant returns that tulips gave in the Netherlands in the 17th century, but whose prices ultimately went bust. This incident, called the 'Tulip Mania', is a popular example cited to explain the formation of a financial bubble.
"A bitcoin is akin to a zero-coupon perpetual; it's like you paid money to buy a bond which pays no interest and which will never pay back the principal. A bond with similar cash flows would be valued at zero, which, in fact, can be argued as the fundamental value of a cryptocurrency." A 'zero-coupon' bond pays no fixed interest, whereas a perpetual bond does not come with an expiry date unlike traditional debt instruments.
Towards the end of his speech, he also argued why banning cryptocurrencies is the most advisable choice open to India. He says that cryptocurrency is not compatible with the regulator frameworks of India since it is fundamentally designed to evade oversight. They undermine KYC (know-your-customer) and financial integrity, and "at least potentially facilitate anti-social activities". He also states that cryptocurrencies can and most likely will wreck the currency system, monetary authority and the government's ability to control the economy.
"They threaten the financial sovereignty of a country and make it susceptible to strategic manipulation by private corporates creating these currencies or Governments that control them. All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India", he concludes.
Sankar has even mentioned the underlying technology power cryptocurrencies - blockchain - and batted for regulating it in India rather than cryptocurrencies.
Also Read: Crypto 2021: The Year Of NFTs, Dogecoin & Legal Confusion In India
Crypto taxation akin to legalisation?
In the Union Budget this year, Finance Minister Nirmala Sitharaman announced that digital assets would be taxed at 30%, leading to a lack of certainty as to whether cryptocurrencies itself were deemed to have been legalised in India.
For starters, Minister of State for Finance, Bhagwat Karad, has explicitly stated that cryptocurrencies are not legal in India. "There is information that some people have invested in cryptocurrencies. Thus, 30 per cent tax has been proposed on transactions (connected to them) in the union budget", he is quoted saying, clarifying that neither the RBI not the government had granted any sort of cryptocurrency in India.
However, in her post-Budget press conference, Sitharaman drew a clear distinction between cryptocurrencies and "digital assets", using the latter terminology for taxation purposes in her budget speech. A "currency" (and by extension a digital currency), she said, is backed by the government and has sovereign recognition, and that the only digital equivalent of that would be the proposed RBI-backed central bank digital currency (CBDC), which are other commonly known cryptocurrencies.
The CBDC is poised to be launched soon, and in a reply to Lok Sabha on February 7, the Ministry of Finance said in a written reply that the government had made necessary amendments to the Reserve Bank of India Act, 1934, in the Finance Bill, 2022, to facilitate this process.
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Also Read: Budget Glossary #3: What Is The Finance Bill?
In 2021, the government made two attempts to regulate cryptocurrencies through proposed legislation in the Winter and Budget Sessions, both of which did not see the light of day.
They had the same statement of intent: banning "private" cryptocurrencies, leveraging blockchain and the introduction of the CBDC.
This is the same stance that Sankar has adopted in his speech above.
His speech can be read here.