Crypto, Not Currency

Cryptocurrency: Ideal law will ban use as legal tender, allow it to be an asset

- Duvvuri Subbarao

Suddenly cryptocurrencies (cryptos) are all over – on social media, on our TV screens, and on the front pages of newspapers. At the Sydney Dialogue last week, the Prime Minister called on democracies to work together on cryptos so that ‘they do not fall into the wrong hands and spoil our youth.’ The RBI governor, for his part, has repeatedly expressed concerns about cryptos being a threat to our macroeconomic and financial stability.

The government will introduce a bill in the winter session of the Parliament for regulation of cryptos that, in a departure from its earlier stance of a total ban, will in fact allow some space for them to operate.

If cryptos are such a big threat, why does the government want to keep the door partially open? And why are the government and RBI seemingly not on the same page? Both questions defy simple answers.

The biggest threat from the government’s perspective must be that, absent any regulation, the crypto world can become like the wild west with cryptos becoming conduits for illegal activity – money laundering, drug trafficking, financing of terrorism, and defrauding of gullible investors. On the other hand, recognizing cryptos as an asset class and regulating them will allow the government to monitor the trading activity, tax the capital gains of investors and enforce some standards of transparency and a code of conduct.

As against this cost-benefit calculation from the government’s viewpoint, I see four possible concerns from RBI’s perspective.