Banking Central | RBI ko gussa kyon aata hai?

Crypto has been around for a while in India--unregulated and unchecked. Except the financial sector regulators, everyone else seems to have an opinion on this instrument. Meanwhile, the crypto lobby has been on a campaign spree to attract fresh investors. But, the regulators, mainly the Reserve Bank of India (RBI), have been extremely cautious about private virtual currencies. The delay in a national regulation on crypto assets is adding to the confusion. Why is the government unable to finalise the rules of the game for crypto players?

I’m told this is due to lack of agreement with financial sector regulators. The Reserve Bank has been maintaining that it has serious concerns on private virtual currencies as a medium of exchange. Now, it is learned that there is no consensus within the RBI top brass on whether even to treat crypto as an investment asset.

Why are the gentlemen at the Mint Road upset with the idea? There are a few possible reasons. First, crypt currency doesn’t have a strong underlying asset. There is nothing to back crypto currencies unlike other recognized asset classes such as gold or securities. Second, the regulator is concerned that this instrument, if recognised by law, can be used freely for international cross border illegal transactions. Third, in the event of a collapse, no one knows who they should approach.

Crypto exchanges are only facilitating the trade. But, these are not regulators. The RBI is willing to look at a central bank digital currency but is against the use of private virtual currencies as asset class. But, even when there is no clarity on the regulation, the crypto lobby is on a campaign spree to attract fresh investors.

Crypto has become a fancy word and those, who don’t even understand it entirely, endorse the risky instrument for retailers. This isn’t a good sign for the retail investors who hope to make quick gains from private VCs. The banking institutions are too apprehensive of crypto, primarily because top regulators have issued strong warning signals through its public comments.

Having said that, crypto currencies are a fast growing trend across the world and the involvement of some well-known investors have added some credibility to it in public perception. Hence, Indian regulators cannot, for long, stay away from some kind of regulations to govern crypto currencies.

The absence of a strong national law can give room to the crypto lobby to run uninterrupted campaigns and the stakes involved will be too high at some point for the financial system to ignore the impact. There are reports that the government may soon finalise its law on private virtual currencies. The courts too have begun to look at crypto.

A week ago, the Delhi High Court sought the response of the RBI and State Bank of India on a plea seeking to direct the authorities to revoke the prohibition on the use of UPI platform in dealing and settling funds in the cryptocurrency exchange WazirX.

The government will have to engage with the RBI and the market regulator, Securities and exchange board of India (Sebi) to reach a consensus on crypto regulations and decide on a national law at the earliest. A prolonged lack of clarity is not helping anyone.

[Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.]