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 central bank's changing stance in favour of a cryptocurrency market in India. Statements were issued by every single 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 Supreme Court. The central bank never spoke in favour of the cryptocurrency. On the contrary, it clearly cautioned banks while dealing in these instruments asking them to follow due processes citing various legal issues. Yet, the crypto industry wasted no time to spin 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 with respect to 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 has conveyed these concerns to the government. "There is no change in RBI’s position (with respect to crypto currencies). With regard to 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 very careful call with regard to his own investments," the Governor said.
This statement leaves no room for anyone to speculate. The RBI doesn't endorse cryptocurrency.
"The RBI governor’s statements on use of cryptocurrency is in line with the stated position of RBI regarding their concerns relating to cryptocurrencies. Considering that the Supreme Court has specifically struck down RBI’s earlier circular relating to restrictions on use of cryptocurrencies, the RBI cannot formally bring out any additional notification which goes against the Supreme Court judgement, however, the RBI has time and again redirected their concerns surrounding the use of cryptocurrency," said Atul Pandey, Partner, Khaitan & Co.
"Considering some of the other jurisdictions including of the Germany recent acceptance of cryptocurrency use, it is hoped that the government and the RBI will look into the regulation of cryptocurrency in India with necessary caveats, instead of restricting it completely," Pandey said.
"It seems RBI wants to caution investors with respect to crypto currencies while acknowledging that officially they can't do so after the Supreme Court set aside the 2018 circular," said Akshay Nagpal, Partner, L&L Partners. "It seems RBI is interacting with Government to bring some regulations against or regulating Crypto Currencies," Nagpal said.
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 in view of 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 where it attracts 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 which experts have cited all along--there is no underlying asset for cryptos, these aren't regulated centrally and the instrument carry high volatility. For a financial system, these are serious risks. According to Madan Sabnavis, chief economist of CARE rating agency, dealing in crypto is akin to gambling and, hence, needs to be banned till regulatory clarity emerges.
“We share the same thoughts of the RBI governor for the investors— to do their own due diligence and take a very careful call with regard to their investments. As an exchange, we offer a safe and secure platform to all our users following strict KYC and AML policies," said Avinash Shekhar, Co-CEO, ZebPay.
"When it comes to the concerns of the government or RBI, we have always requested for an open discussion with us and other players in the crypto industry to jointly find a solution that a) clarifies the regulatory position b) take care of the concerns, and c) protect the crypto investors,” said Shekhar.
The RBI's message today is very clear. The central bank doesn't want to be seen as endorsing crypto without proper laws in place. 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 operate 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 India Economic Conclave, Das said the central bank has flagged some major concerns to the Government about crypto currencies. "Both RBI and the government are committed to financial stability. We have flagged some major concerns to the government on crypto currencies. 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 is 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.