In the last few months we have seen a collapse in the world of cryptocurrencies. In May, the Luna Terra stablecoin crashed, and in November we saw a shocking meltdown of FTX exchange, which was a crypto exchange. If we add the continuous volatility in the prices of other cryptocurrencies, the crisis circle is complete.
Mark Twain allegedly said that history may not repeat itself, but it rhymes. These words come true time and again in the world of money and finance. Something new comes in money and finance which gives hope of continuous growth and prosperity. People rush towards this new craze, and the price surges due to the law of demand and supply. Overtime, people realise their follies, and the mania becomes a panic, leading to a crash. These events reoccur so many times that Charles Kindleberger, an economic historian, even wrote a classic named ‘Manias, Panics and Crashes’, which has many tales of similar rises and declines. We see crashes not just across assets such as equity and housing, but also across locations from ‘Tokyo to Bangkok to New York’ as discussed in the book.
Behind all these manias and crashes lies the core human belief that humans can create money or ways of earning money from thin air. US economist John Kenneth Galbraith in his book, ‘Money, Whence It Came, Where It Went’, explained this human folly beautifully:
“Men possessed of money, like men earlier favored by noble birth and great title, have infallibly imagined that the awe and admiration that money inspires were really owing to their own wisdom or personality. The contrast between their view of themselves, as so enhanced, and the frequently ridiculous or depraved reality has ever been a source of wonder and rich amusement.”
The cryptocurrency crash resonates with Twain’s and Galbraith’s words, and adds another chapter to Kindleberger’s book. The Bitcoin idea soon gave way to mania which is now being followed by panics and crashes.
Amidst the ongoing mayhem, Indian regulators were highly conservative, and warned the public regularly to stay away from cryptocurrencies. In 2017, the finance ministry instituted a committee to study cryptocurrencies, which suggested the government to ban them; and asked the Reserve Bank of India (RBI) to issue a central bank digital currency (CBDC). The RBI has recently introduced two pilots for wholesale and retail CBDC. In 2018, the RBI banned all its regulated entities from participating in cryptocurrencies. This ban was overturned by the Supreme Court in 2020, which led to mushrooming of crypto exchanges. The government did not bring a law to ban cryptocurrencies despite it being tabled in Parliament, but imposed a tax on virtual digital assets. Instead, the government and SEBI have constantly promoted mutual funds for retail investors.
While we do not know the exact number of crypto investors and scale of investments in India, in all likelihood the Indian investor community has not faced the brunt of crypto meltdown as have the investors in other countries.
One might argue that this is hindsight, and one cannot give credit to the government and regulators. It may be hindsight, but the authorities have been cautioning against investments in cryptocurrencies for a long time now. The authorities do deserve credit for this constant message of ‘investor beware’.
Does this mean that cryptocurrencies were all bad, and did not have merit? No new financial idea or product is bad per se. What has been a problem is this human adventure and endeavour to find the lamp with the financial genie.
However, while cryptocurrencies have had this allure, in the process they have led to multiple innovations which are being used in various fields. For instance, blockchains and digital technologies are being used in land records, contracts, and so on. Cryptocurrencies have also shaken the world of central banking. The central banks have learnt that even if cryptocurrencies are risky, digital currency is here to stay. So we see most central banks working towards issuing CBDCs not for just promoting digital payments, but for wider purposes such as financial inclusion, cheaper and efficient cross-border remittances, and so on. Finance Minister Nirmala Sitharaman also announced in her 2022-23 Budget Speech that the digital rupee will be based on blockchain technology.
The uncertainties cryptocurrencies have created, the challenges they are posing, and the opportunities that have arisen because of virtual digital assets—all these point to the fact that it is high time we had a law governing this, and the government clearly stating its position on the subject.
Views are personal and do not represent the stand of this publication.
