Amol Agrawal
The government takes enormous pride in making everything digital. It should perhaps apply similar principles to government committees which are taking longer than the pre-digital era to do their job.
This is the case of a panel that was set up in the beginning of November 2017 to “propose specific actions to be taken in relation to Virtual Currencies”. The committee has submitted its report, but with a delay of more than a year and a half.
The irony is hard to miss as its subject matter is virtual currencies (VC) where transactions take place at lightning speed. Cryptos are a subset of virtual currencies, but we will use it interchangeably with VC and digital currency in this piece.
According to the report, countries are divided into three categories when it comes to VCs.
- Those with no legislation or regulation on VCs such as US
- Countries having legislative or regulatory framework on VCs: Canada and Russia allow VC to be used for barter purposes, Switzerland and Thailand allow VC to be used for payment, but are lot legal tender, which means people are not liable to accept these as payments.
- Those that have imposed ban or restrictions on VCs such as China
The panel has proposed India to be in the third category and asked for a ban on all private VCs. It “recognises that while technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system, virtual currency in and of itself does not have any of the benefits associated with a fiat currency”.
This is hardly anything new as both the government and the RBI have already announced that private cryptocurrencies, including Bitcoins, are not legal tender in the country.
The then finance minister Arun Jaitley in the Budget speech of 2018-19 had categorically said: “The government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system.”
This was followed up by the RBI in its April 2018 monetary policy meeting. “The Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies,” the central bank had said.
The banking watchdog further said “in view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time”.
Since these policy statements, the exchanges which offered VC services have closed down and the CEO of one such exchange has been arrested.
Despite these notifications, the committee notes that how Indians continue to invest in cryptos which have no backing of the government. This requires a law that bans any activities linked to cryptocurrencies in India.
The committee, however, is open to the idea of a central bank digital currency (CBDC). The advantages are a CBDC could be made available 24 hours, 7 days of a week. It is also seen as safer and cheaper to transport compared to physical cash, which improves settlement speed, especially for cross-border payments. Facebook is trying to suggest the same point for its own Libra.
The disadvantages are CBDCs will require significant fixed costs to produce, the variable costs will remain high due to high electricity usage and safety could be a concern for consumers.
There is this obvious threat of losing seigniorage to private players, but the committee is of the view that this is not relevant in India’s case where the usage of fiat currency remains high.
CBDC also opens up new questions over whether central banks will provide this digital currency by opening bank accounts with itself or should it continue to be provided by commercial banks? If it is former, then all of a sudden, we have central banks becoming competitors to commercial banks for opening accounts.
This could be really problematic during a financial crisis as people will shift their bank deposits from banks to the central bank. Central Bank of Denmark cited this is a major disadvantage for not moving ahead with the idea of CBDC. However, the central bank of Sweden is pushing ahead with the idea of CBDC as cash usage, hoping to iron out these issues over time.
Given the mix of advantages and disadvantages, the committee has called for an open mind. It has suggested a group of government officials and the RBI to look into whether we have a CBDC in India or not.
Having said that, one feels that the committee has been harsh on private cryptos. First, these started as currencies but soon became an asset with values changing like any other exchange traded asset such as shares or bonds. There have been few scams pertaining to these crypto assets, but it is not as if the other assets have been scam free. They hardly pose a threat as most of these reports suggest.
Second, by banning them outright, India missed an opportunity of engaging private players in development of several technologies that go into crypto assets. The government agencies can manage this innovation on their own, but cooperation with the private sector could have led to better results. Some countries have started sandboxes which allow private players to develop technologies in a laboratory setting allowing co-learning and playing of economies of scope.
We could have allowed something similar in this space where even if you do not allow them to be the legal tender, you still push the other boundaries. Even if the government does not allow the private sector to issue digital currencies, private players will play a big role in promotion of digital payments. One could think of merging some of the technologies used in crypto currencies in the payment space and promote better protection of privacy, which the current system lacks severely.
As a student of banking and monetary history, one goes back to England’s Peel Act of 1844. Before 1844, the private banks could issue their own notes in England. After the Act, only the Bank of England was allowed to print banknotes. England followed this with disallowing private note issuance in India in 1861. Even historically, governments have not allowed private note issuances citing all kinds of fears as they cite today. How much times change and still they remain the same!
Amol Agrawal is faculty at Ahmedabad University. Views expressed are personal.
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