FTX Collapse: RBI has the last laugh on crypto. If you ignored Das’s warnings, the joke is on you

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On November 17, 2021, a Moneycontrol column argued why investors in crypto assets should not ignore the repeated warnings by Reserve Bank of India (RBI) Governor Shaktikanta Das on the potential risks posed by virtual currencies (Read here).

Das and his colleagues at Mint Road have been fighting a staunch battle against legalising cryptos. One of Das’s deputies even publicly called for a crypto ban in February 2022 (Read here).

Why is the RBI so opposed to cryptocurrencies? 

The RBI has, time and again, cited the following factors.

One, cryptocurrencies cannot be defined as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; they are akin to Ponzi Schemes, and may be worse.

Two, Cryptos undermine financial integrity, especially the KYC (know your customer) regime and AML (antimony laundering/ Combating of Financing of Terrorism) regulations. They potentially facilitate anti-social activities.

Three, crypto-technology is underpinned by a philosophy of evading government controls. They have been specifically developed to bypass the regulated financial system.

Four, the argument that crypto heralds a new technology is flawed. The blockchain technology it is based on is 10 years old and it can grow even without cryptocurrencies.

Crypto campaign 

Remember, the repeated warnings from Mint Road came at a time when the crypto lobby was waging a nationwide campaign to attract fresh investors into India’s unregulated virtual currency market.

At one point, there were even newspaper advertisements offering training in crypto trading to retail investors.

The RBI had to clarify on an April 2018 circular that imposed restrictions on cryptos after the Supreme Court struck it down in 2020.

But, by then, banks had got the silent message from the upset regulator—stay away from crypto transactions.

Then came the global crypto crash…

A year after Das’ warnings, the Indian banking regulator has had the last laugh in the crypto controversy. Cryptos are collapsing globally. The value of major crypto currencies including Bitcoin and Ethereum have crashed.

The numbers 

Polkadot Currency, which was introduced in November 2021, has dropped nearly 85%, Bitcoin, which hit over $63,000 in April 2021, is now down nearly 75% from that level. Ethereum, which hit a high of around $4,800 in November, 2021 has fallen 73% since. Binance Coin, which hit a high of $670 in May 2021, is now down by 58%.

The FTX bankruptcy is probably the final blow to the global crypto lobby. The FTX bankruptcy has further dented sentiment; crypto mining firms listed in Toronto expect more turmoil and a lingering crisis of confidence in digital assets after the collapse of Sam Bankman-Fried’s Bahamas-based FTX. (To read how FTX collapsed read this)

Indian investors too have faced the heat. As Moneycontrol reported, many Indian investors, especially the young, are facing a crisis after losing their hard-earned money in the crypto sell off.

RBI caution saves investors 

The RBI has done an excellent job forewarning investors about the perils of an asset that has no underlying value or regulatory protection and can be manipulated easily.

The RBI’s dislike of unregulated, risky financial instruments and schemes associated with poorly run institutions are well known. There have been many cases in India over the last few years where retail investors have lost money investing in complex, risky and often unregulated instruments and institutions.

The examples include significant retail investments in unregulated chit funds, poorly run cooperative banks and private financial institutions. The central bank’s thinking is that such events should not happen in the unregulated cryptocurrency market too.

Are RBI, government on the same page? 

That’s the bigger question. India's crypto double standard, as far as the views of both the RBI and government are concerned, is hurting investors.

On one hand, the RBI is waging a campaign calling crypto a "clear danger" that has no underlying assets, cautioning investors not to gamble away their money. On the other hand, the government is silent on its legality, but busy collecting taxes on transactions in digital assets. Meanwhile, investors desperately look for clarity.

The mess either shows both the parties aren't talking enough to the other on this issue or, worse, aren't in good talking terms on the subject. More worrying, the ever-ambitious Indian crypto lobby has hired spin masters who smartly play up the silence of government, and the taxation as an admission of the legality of virtual assets. This leaves investors in more confusion.

New Delhi doesn't have a clear policy on crypto transactions. In the past, the government kept saying it will come out with a blueprint soon, but this never came. In the meanwhile, the government is busy collecting taxes both on the gains on transactions and at the source.

This is when the RBI, under the leadership of Shaktikanta Das, keeps warning investors against crypto transactions. Das's deputies are openly calling for a ban on cryptos, listing the risks and bigger macro-economic risks.

The RBI's eloquence and the Narendra Modi government's dead silence on crypto regulations don't add up.

The failing crypto dream 

For the young, not-so-informed investor, crypto is like magical stone they heard about in fairytales that turns everything into a fortune overnight. For them, it makes sense as wealth build in equities is a time-consuming exercise, real estate assets are fighting a demand lull and fixed income instruments are yielding negative rates. The crypto lobby understands this psychology well and is betting big on this.

The current meltdown in the crypto market globally gives ample opportunity for the government to make its stance clear on regulations.

All the risks the central bank has been warning of  make immense sense now. The only solution for India's crypto conundrum is quick regulation--or an outright ban.

An undecided government recently issued a consultation paper seeking inputs from various stakeholders on cryptos. Hopefully, this time, it will result in clear regulations.

Until then, the crypto lobby will continue playing on investor psychology while the government is busy collecting taxes on transactions in an instrument that’s robbing the central bank of it sleep.