Risk making wrong norms for crypto without more data: RBI Deputy Governor Rabi Sankar

T Rabi Sankar (Image: ANI)

Initiatives to gather data on crypto need to be undertaken quickly before any regulations are formed so that "wrong set of prescriptions" are not issued, a top Indian central banker has said.

Speaking on December 9 at a discussion, Reserve Bank of India (RBI) Deputy Governor T Rabi Sankar said the entire discussion on crypto had poor foundations when it came to data.

"Data is not available. Whatever data is available is misleading. And making regulations in absence of adequate information carries a very high probability of we actually ending up with the wrong set of prescriptions," Rabi Sankar said in the discussion organised by the International Monetary Fund (IMF) on regulation and supervision of crypto assets.

"I think the first step is to collect adequate, reliable, consistent information before we talk about exactly how they (crypto) need to be regulated and whether they need to be regulated," he added.

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Taking the example of India, Rabi Sankar said it was misleading to draw any conclusions from the fact that India had five million crypto investors.

Citing data collected by the RBI in November 2021 from four top crypto exchanges, Rabi Sankar said 80 percent of the five million investors had invested less than $120, with an average holding equivalent to $20. Further, less than 100 of the five million Indian investors held more than 40 percent of the assets.

"A large part of the crypto discussions that is going on now or have been going on for 2-3 years is premised on very little data. Most of us are basically talking based on anecdotal experiences," Rabi Sankar said, calling for an initiative along the lines of the Organisation for Economic Co-operation and Development's (OECD) Crypto-Asset Reporting Framework.

"I think such initiatives need to be finalised quickly as they would enable an automatic exchange and update across jurisdictions that are members pretty much on a real time basis. So that kind of initiative is what I had in mind when I said we need global coordination," the central bank official said, adding that given the level of coordination that would be required, global agencies - including the IMF - should take the lead to help regulate crypto better.

This is not the first time that India has called for global norms to be put in place to regulate crypto. In November, finance ministry officials had said India would look to find a consensus-based solution to the challenge of virtual assets during its presidency of the G-20, which it assumed on December 1.

Implicit regulatory approval

Speaking more broadly, Rabi Sankar expressed concern that regulators globally had perhaps accorded an implicit approval to crypto assets, which then helped spur the crypto craze in recent years.

"We as regulators, as public authorities, need to be a little more forthright in the way we deal with new concepts, like crypto assets, that come to the fore. I would suspect that the crypto craze would not have attained the proportions it did over 2020 and good part of 2021 if there was not some sort of an implicit acceptance (from regulators) that they could be useful," Rabi Sankar said.

"We (at RBI) have been trying to shield our banking system in India away from it. We told very clearly that outright prohibition can be a valid policy option for specific countries. That is something that was not very commonly talked about by regulators as far as I know," he added.

Rabi Sankar argued that any regulation of crypto must be premised on a clear understanding of what it and what it is supposed to do.

"If we want to talk about regulation in general terms, there is a risk that we would give a general sense of approval to these instruments."

The deputy governor warned that a common language would have to be spoken for effective regulation of crypto. This, he said, would be difficult due to a lack of clarity on what function crypto performed better than the traditional financial system.

"The other reason why it will be difficult is because different jurisdictions are looking at cryptos differently. Some of them are looking at it as commodities, some of them as an asset, some of them as currencies. In our view, it doesn't answer to the definition of any one of them in the way that these terms – currencies, assets, or commodities – are understood in the financial markets."

Crypto meltdown lessons

Asked if the meltdown in crypto prices this year held any lessons, Rabi Sankar said it all came down to value; even when prices crashed, discussions on under or over-valuation were absent, unlike what would have happened had it been financial assets.

"You may not know exactly to what extent something is overvalued or undervalued, but you have some sense of where they are. To be able to do that, you should be able to peg what can be an equilibrium value, what is an inherent value. I think what it showed, in the case of unbacked crypto, is that they essentially lack inherent value. So it is just a question of what a buyer is willing to pay for it, which is merely speculative value."

With regard to stable coins, the issue is not so much the absence of inherent value but of governance, trading volumes, and liquidity in the market, he said.