Many major democracies, such as the US, Canada and the UK, allow the use of Bitcoin. Even the tiny Latin American nation, El Salvador recently accepted Bitcoin as legal tender.
Bans and prohibitions are in fashion. At all levels—Central, state, and local—government is on a spree to outlaw liquor, meat, free speech. And now cryptocurrencies or virtual currencies (VCs) like Bitcoin appear to be next
The Narendra Modi government intends “to prohibit” cryptocurrencies. In the winter session, it wants to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The objective is: “to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
The RBI must be very happy, not just because it would get the mandate to issue digital currency, but also because the move endorses its view on cryptocurrencies. It is a well-known fact that the central bank has been waging a war against them. It even banned them, though its decision was overturned by the Supreme Court.
Despite the apex court verdict, RBI has stuck stubbornly to the demand to proscribe all private VCs. In September, the RBI Governor said that the central bank had conveyed its “serious and major concerns” over virtual currencies to the government. The so-called concerns, as we shall see, are misplaced at best and smack of the central bank’s statist approach at worst.
On 4 March 2020, a three-judge bench of the Supreme Court had invalidated the central bank’s ban on cryptocurrencies. It was imposed in April 2018.
It was on 31 May this year, however, that the RBI directed banks not to cite its 2018 ban as a reason to deny banking services to customers dealing in VCs. “It has come to our attention through media reports that certain banks/regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the” ban it had imposed, an RBI circular said.
So, it took a year for the RBI to realise, and that too from media reports, that the entities regulated by it still regarded virtual currencies as proscribed.
It directed the banks that, following the apex court order, the earlier circular proscribing virtual currencies was no longer valid. The circular went on to add, “Banks, as well as other entities addressed above, may, however, continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.”
Banks continued to caution their customers against dealing cryptocurrencies because the RBI, ignoring the SC verdict, persistently campaigned against the innovation. In the last week of February this year, the RBI Governor raised concerns over VCs. A month later, he reiterated that the RBI had major concerns. Then again in June. His opposition to VCs seems to be more than the reservation of a statutory regulator regarding an issue.
So, the RBI remains hostile towards and suspicious of cryptocurrencies, which are digitally encrypted, decentralised, and not regulated by any central bank or government. Right from the beginning of cryptocurrencies in the 1980s, its votaries were anti-establishment activists whose distrust of central banks as well as governments was libertarian-like.
As one of them, Adam Back, wrote: “What we want is fully anonymous, ultra-low transaction cost, transferable units of exchange. If we get that going… the banks will become the obsolete dinosaurs they deserve to become.”
The parent of the first successful cryptocurrency, Bitcoin, is a mysterious, unknown figure by the name of Satoshi Nakamoto. He is said to have sent an e-mail in August 2008 to Adam Back, along with an attachment, a white paper. According to Satoshi, “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency but the history of fiat currencies is full of breaches of that trust.”
He and other cryptocurrency enthusiasts overcame the problem by bypassing all central banks and governments. Bitcoin was born and became hugely successful, attracting billions of dollars in the last few years.
Yet, as evident from Shaktikanta Das’ recent salvo at VCs, the central bank is unwilling to accept this development. This does not show him and the RBI in a good light; the central bank starts looking like instinctively hostile to innovation. And that can’t accept anything it can’t control.
The government’s approach is similar to that of the RBI’s. Earlier too, it planned a law to ban VCs; it wants to do that again. This is not much different from the Chinese attitude which has outlawed VCs.
On the other hand, many major democracies, such as the US, Canada and the UK, allow the use of Bitcoin. Even the tiny Latin American nation, El Salvador with a population of 6.5 million, recently accepted Bitcoin as legal tender.
It is not that the RBI has nothing important to do. “Gross non-performing assets (GNPAs) on retail and MSME loan books of public sector banks rose to 7.28 per cent in June 2021 from about 6 per cent a year ago. The incidence of bad loans was lower for private banks with GNPAs at 3.32 per cent in June, up from 2.01 per cent year ago, according to CARE Ratings,” says a news report..
Another report says, “Public sector banks are experiencing a sharp surge in the proportion of Mudra loans turning into non-performing assets (NPAs) following the impact of Covid on incomes and repayment capacity of borrowers, according to bankers and an analysis of available data from state-level bankers’ committees.”
Then there is the issue of financial inclusion, in which India is a laggard. The recently unveiled RBI’s annual Financial Inclusion Index showed the country at 53.9, where 100 is the full financial inclusion score.
These are the substantive issues RBI should focus on rather than banning Indian VCs.
The government too should worry about the real threat of a K-shaped recovery rather than the RBI’s conservatism. The government should remain cognizant of the fact that ban on VCs will be in violation of a Supreme Court verdict.
Ravi Shanker Kapoor is a freelance journalist.