Chief economic adviser echoes central bank: Crypto and DeFi are regulatory arbitrage, not financial innovation

CEA V Anantha Nageswaran (Illustration: Moneycontrol)

Chief Economic Adviser V Anantha Nageswaran has said crypto and decentralised financial instruments seem to be a case of regulatory arbitrage rather than financial innovation.

"Decentralised finance...I would reserve judgment on whether it is truly innovative, or truly disruptive in a positive sense, or is it something that we would come to regret," he said at the India International Fintech Festival hosted by The Associated Chambers of Commerce and Industry of India.

"Much of what is happening in the space of cryptos or decentralised finance – and I completely endorse what Rabi Sankar, Reserve Bank of India (RBI) Deputy Governor, has been saying – as of now they do appear to be a case of regulatory arbitrage rather than a case of true financial innovation in my opinion."

Sankar has been critical of private cryptocurrencies over the last year or so and called for more scepticism when it comes to these technologies.

While the RBI is adamant that private cryptocurrencies pose a threat to the financial system and would never be legal tender, New Delhi has started taxing transactions involving crypto and is expected to soon finalise a consultation paper on the subject. The government has refused to make public its stance on crypto before the release of the consultation paper.

According to Nageswaran, crypto and decentralised finance have yet to pass the test to qualify as fiat currencies. Moreover, the absence of a regulator in the space has led to certain issues, with the government's top economist citing the case of Luna whose value dramatically crashed last month.

"I wouldn't be very excited by them because sometimes we may not be fully aware, we may not be able to fully comprehend the forces we are unleashing," Nageswaran said, adding that he wasn't sure if these kinds of "innovations" will continue to thrive as interest rates harden.