Lesson from the FTX explosion: Regulate crypto to avoid casualties

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The large blast-radius of the FTX explosion is an eye-opener for governments across the world, India being no exception. This bears a clear message to the Indian government: regulate or ban cryptocurrencies outright, now.

Let us understand why. FTX was the second biggest crypto exchange in the world, managing around $1.9 billion of investor wealth. According to a Reuters report, at least $1 billion of customer funds have vanished from FTX.

Even for a large organisation such as FTX operating in a developed market under better supervision, there is no immediate way for investors to get their money back. FTX investors may lose their money, or they have a long wait ahead.

What if something similar happens in a country like India, where the government’s power to monitor such organisations or handle a crisis is questionable?

Moneycontrol had addressed this question in an earlier article.

India doesn’t have any regulations pertaining to cryptocurrencies at the moment. This gives room for crypto companies to acquire fresh investors. The website of one of the largest Indian crypto exchanges asserts that crypto investments are legal, even though the sector isn’t regulated.

An average investor is easily misguided by such vague disclosures.

Also read:  Collapsed FTX owes nearly $3.1 billion to top 50 creditors

Experts have warned time and again that Indians investing in cryptocurrencies may be taking a highly risky bet in the absence of regulations by the Reserve Bank of India and the government with respect to these instruments.

A worried RBI has been cautioning investors to stay away from the crypto craze, with one of the deputy governors even calling for its ban. “Investors who have acquired these instruments have done so with their eyes wide open, at their own risk, and do not warrant any regulatory dispensation,” deputy governor T Rabi Sankar said in February 2022.

But the lure of easy money is big, particularly at a time when there aren't many attractive investment options in the present economic environment where real interest rates are negative.

Due to factors such as the Covid crisis and the poor rate of returns on traditional financial investments, cryptocurrencies look like an attractive investment option, like gold or real estate.

There are no official figures, but some estimate that about 1.5 crore Indians have invested approximately Rs 15,000 crore in cryptocurrencies.

There are several cryptocurrency start-ups in India. Crypto exchanges such as  WazirX, CoinSwitch Kuber, and others have seen a big rush in demand from users, and they have been advertising heavily.

But the RBI’s hands are tied when it comes to the crypto chaos.

In 2018, the RBI banned all banks from dealing in cryptocurrencies.  The Supreme Court, however, overturned the ban on a plea by the Internet and Mobile Association of India (IAMAI).

The SC said that while the RBI had the power to regulate virtual currencies, in the absence of any legislation, the business of dealing in these currencies ought to be treated as a legitimate trade that is protected by the fundamental right to carry on any occupation, trade, or business under Article 19(1)(g) of the Constitution.

Thus, that means only the government can now resolve the problem by enacting a law that restricts operations, or bans cryptocurrencies outright.

The absence of regulatory clarity would mean that crypto investors may be at high risk if the government decides to ban crypto currencies in India, or if there is a major FTX-like collapse or fraud.

The government shouldn’t wait for an FTX-like train wreck to happen. It should either regulate or ban cryptocurrencies without further ado.