Cryptocurrency is likely to die a natural death with its lure ebbing fast as inflation leads to a rise in interest rates and people turn to other assets to invest in, a member of the Prime Minister's Economic Advisory Council (EAC) said.
“Because of inflation, interest rates started to go up, so they (people) began to have other assets to invest in and people started pulling out of cryptocurrencies. I believe that crypto will die its own natural death, just as the tulip mania did as it is no longer attractive unless we again retreat to an extended zero interest rate regime in the advanced economies. It will become a non-issue,” PM-EAC part-time member Rakesh Mohan told Moneycontrol.
With interest rates rising, fixed income has become attractive again as an asset class globally. In a rising interest rate regime, the short-term rates, including those on the money market instruments, go up. With an increase in bond yields, thanks to the policy rate hikes by the RBI, the overall outlook for fixed-income return improves. Debt schemes with short-maturity profiles tend to benefit and are likely to deliver better returns.
“Crypto grew because we had near-zero interest rates in developed countries for an extended period so people were searching for higher returns. In my view there has been excessive attention to crypto in recent years, worldwide,” he said.
Amid the turmoil in the cryptocurrency market, India is working with the Financial Stability Board (FSB) so that a consensus on a roadmap for regulating virtual assets could be agreed upon during India's G-20 presidency itself.
Crypto assets are self-referential instruments and do not strictly pass the test of being a financial asset because they have no intrinsic cash flows attached to them. US regulators have disqualified Bitcoin, Ether and various other crypto assets as securities.
“Cryptocurrencies have no backing whatsoever against the central bank assets that have to match liabilities. Every central bank currency has backing, and every rupee, dollar and yen is backed by some assets. Crypto is fictitious, speculative with no value behind it,” Mohan said.
Mohan, who served as former RBI deputy governor from 2002-09, is also the President and Distinguished Fellow at the Centre for Social and Economic Progress.
India is looking to build an international consensus on the regulation of these assets, with the argument being that only a global collaboration would be effective given the cross-border scale, scope, and challenges presented by crypto.
Members of the G20 agree that a globally coordinated understanding would be required not only to deal with the challenges posed by crypto assets but also to regulate them. During India's presidency of the G20, a ‘synthesis paper’ will be taken up on matters related to crypto assets, Union Finance Minister Nirmala Sitharaman had said earlier.
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