Caveat Crypto: Beware Purveyors & Proponents Of CryptocurrenciesBloombergQuintOpinion
Buyer beware, or caveat crypto, is the essential call that would be best to heed.
Governmental And Regulatory Reactions
As the values of bitcoins, cryptocurrencies, and crypto-assets have risen and attracted more and more interest, regulators and governments have taken different tacks.
Japan for instance has chosen to recognise and regulate cryptocurrency exchanges.
The U.S. Securities and Exchange Commission has prevented initial coin offerings and ensured reversal of those that occurred.
In the United Kingdom, the Financial Conduct Authority cautioned consumers as recently as January 2021 on risks of crypto assets going as far as to say “...be prepared to lose all their money.”
Concerns for regulators stem from the anonymity or pseudo-anonymity which, taken with the ease of cross-border transfers and transactions, create a concern of money laundering. Similarly, the usage of bitcoins or other cryptocurrencies as the medium of shakedown when cyber-attacks are threatened or executed (such as ransomware) or on the dark web where illegal or criminal activity takes place, only serve to enhance and amplify such concerns.
Indian Regulators – Awake And Alert
Regulators in India have been clear and direct from early on in the issuance of such cautions. RBI did so on three occasions (in December 2013, February 2017, and December 2017) and the Government of India, Ministry of Finance also issued a press release in December 2017 titled ‘Government Cautions People Against Risks in Investing in Virtual ‘Currencies; Says VCs are like Ponzi Schemes’.
One should acknowledge that regulators have been alive to the issues and concerns regarding cryptocurrencies and crypto assets, and not hesitated in informing the public at large on the dangers, and deserve to be applauded.
Such words of caution and warnings have been clear, stark, and unprecedented in recent memory.
Bear in mind that regulators are conservative and avoid creating any controversy or grandstanding. Of course, with the losses that members of the lay public have faced in 1990s (plantation companies, vanishing companies) or in the 2000s and 2010s (Sahara, Saradha group, and so on), such callouts and cautions are all too necessary.
Here’s an excerpt: “...the potential financial, legal, and security risks arising from their use...” or “..the absence of counter parties in usage of virtual currencies, including bitcoins, for illicit and illegal activities in anonymous/pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism laws.”
Given the continual drumbeat at the time, its concerns remaining unabated or in fact increasing, RBI went further in April 2018 and prohibited entities regulated by it from dealing in virtual currencies or providing services for facilitating any person or entity in dealing with or settling virtual currencies. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them, and transfer or receipt of money in accounts relating to the purchase or sale of virtual currencies.
Rationale For RBI’s Action
It is not too difficult to divine the reasons for the prohibition. The reputation risk to the formal, regulated financial services sector arising by providing access to the dealers and exchanges in cryptocurrencies or crypto assets.
A corollary is the projecting of a veneer of respectability that cryptocurrencies or crypto-assets and their dealers and exchanges acquire by associating with the regulated entities and project the same to gullible public. As ready and unfortunate examples of financial firms that collapsed demonstrate, there’d be also a clamour for bailouts and recompense, and best avoided.
Then there’s the entire negation of the foreign exchange control regime that the cross border nature of cryptocurrencies achieves. It can be considered as a modern and techno version of hawala, and of keen interest to those with illicit or criminally-obtained money, for salting away in obliging jurisdictions. That one can attribute the receipts being from soaring prices of the cryptocurrencies also serves to provide an ostensible explanation as to the source of funds and plausible explanation to the bank or financial institutions where the money is finally banked.
For all the anarchists’ underpinning as also disdain for central banks and fiat currencies (and their alleged debasement by the said central banks), the clamour for being permitted to avail of banking services should really raise the antennas of all thinking individuals and institutions. What it conveys is that the traders and exchanges want the debased fiat currencies that the lay public holds being exchanged for the new and shiny cryptocurrencies and crypto-assets that the purveyors and proponents hold, and that should tell you more than any arguments for and against can.
One would go as much forward as to say that if the banks can be thought of as hospitals, then purveyors of cryptocurrencies and crypto-assets are tobacconists wanting to set up shop in the hospitals. To carry forward the analogy a bit further: Such cryptocurrencies and crypto-assets will be as bad for your financial health as much as tobacco is for your health.
Supreme Court Verdict
The judicial challenge to RBI’s prohibition on entities regulated by it from dealing with cryptocurrency traders and exchanges resulted in a completely unexpected outcome for the banking regulator as much as the challengers of the prohibition.
In a judgment penned in a story-like fashion with chapter headings suggesting heroes and villains, twists and turns, of the nine issues the Supreme Court framed, it found in favour of the banking regulator on eight of them, and in the issue that mattered the most, it shockingly struck down the prohibition as being premature and disproportionate.
The judgment also is a setback to a regulator's ability to take preemptive action of what it considers to be a known and looming disaster or of a certain coming storm by specifying a threshold that is unfortunate and deserves rethink and review. It expects actual harm before a regulatory prohibition on dealing can be put in place.
As specified, several clear cogent reasons didn’t appear to have been considered by the Supreme Court, and that RBI wasn’t just taking preemptive action but dealing with a clear and present danger.
The Road Ahead
Even as the values of cryptocurrencies began to soar ever so higher and the drumbeats mounted in social media and print media, the government has signalled its intent to take forward the logical response of prohibition of cryptocurrencies by introducing legislation that outlaws the same in the country.
It also sets out the legislative charter for RBI to introduce a digital currency, and in a way similar to the path that China has taken. Such central bank digital currencies — CBDCs — promise to be shorn of all the negatives that cryptocurrencies have.
Whether such CBDCs will hold the lay public as enthralled as cryptocurrencies and whether such CBDCs become a real and effective medium of exchange in a digital India remains to be seen.
Pramod Rao is Group General Counsel at ICICI Bank. These are his personal views.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.