Banking Central | Tulips or crypto—who wants to make a quick buck?

The Reserve Bank of India on Friday kept key policy rates unchanged and also retained its accommodative stance. This means that existing and new borrowers will continue to enjoy benign interest rates for now. Moreover, several banks have rolled out festive offers with discounted interest rates for home loans as also other retail loan categories. Existing borrowers can use this opportunity to reduce their interest burden by switching lenders.

As soon as Finance Minister Nirmala Sitharaman announced a 30 percent tax on digital assets in her Budget speech on February 1, the crypto industry unleashed a campaign, dubbing the move as an indirect recognition of the instrument by the government.

Some even went a step further to call it a step towards legalising cryptocurrencies whose popularity has been zooming despite operating in a regulatory grey area. 

The recent comments from the Reserve Bank of India (RBI), however, should have had a sobering effect on crypto investors.

Talking to the media after sharing the outcome of the monetary policy committee, RBI Governor Shakitkanta Das said, “As far as cryptocurrencies are concerned, the RBI stance is very clear. Private cryptocurrencies are a big threat to our financial and macroeconomic stability." 

"They will undermine RBI's ability to deal with issues related to financial stability,” the country’s top banker said in a statement, his first after the government proposed crypto tax in the Budget 2022.

Das is probably the first and only Indian technocrat who has dared to take on the crypto lobby, time and again, to protect investor interest.

The government, on the other hand, has kept its cards close to the chest, simply saying taxing crypto is its sovereign right and without getting into its legal aspects. “Nothing has been done, at the moment to legalise, ban, or de-legalise cryptocurrency in India,” Sitharaman said in response to a question in the Rajya Sabha.

Also read: RBI Monetary Policy | Governor Das’ tulip warning on crypto has a message for government

Muddled track 

We have a situation at hand. The government hasn’t decided on the legality of the cryptocurrency except saying it will tax the gains, thereby indirectly acknowledging the instrument. 

The RBI, on the other hand, has been consistently voicing its misgivings and cautioning investors that they are investing in crypto at their own risk.

What should crypto investors do? It is entirely up to them. The RBI’s repeated warnings are a wake-up call— investors need to understand the risks involved.

The government’s tax move should be read, irrespective of what crypto platforms say, as an effort to discourage crypto investors till there is a legal framework in place. 

‘…not even a tulip’

Why is the RBI so dead set against crypto? The answer lies in Das’ comment.

“I think it is my duty to tell investors that what they are investing in cryptocurrencies, they should keep in mind that they are investing at their own risk. They should keep in mind that these cryptocurrencies have no underlying (asset). Not even a tulip,” Das said during the MPC press meet.

Typically, any asset class—gold, equities or real estate—carries an underlying asset that backs such investments. This means, if something goes wrong with the investment, the investor can draw comfort from the fact that there is an asset that backs this investment. 

What Das is saying is that crypto has no such backing. This puts investors at high risk.

High-risk, high-return instruments always find takers. These investors may still go for crypto, notwithstanding RBI’s warnings.

But for those who play safe, there are plenty of other options. This is particularly true for senior citizens.

History is littered with examples of gullible retail investors burning their fingers by putting money in such assets, now is not the time to repeat those mistakes.

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