The fight against black money is still on and tax data does not show that there has been encouraging success in this area. Under these conditions, it is best to keep away from cryptocurrencies and illegalise the same.
With the Bitcoin touching the $50,000 mark, the cryptocurrency concept is back on the discussion table. A cryptocurrency is an anonymous currency created using blockchain technology, and it can be used for buying goods or as an investment. Investors like this concept as cryptocurrencies operate without any regulation. Hence no one has seen the inventor of the Bitcoin, even though a name is associated with it. In addition, the belief is that governments and central banks don’t do the right thing with currencies and hence it makes sense to invest in cryptocurrencies. If this is the raison d’etre of having such currencies, the irony is that its value is denoted in dollars, which anyway is accepted as the major anchor currency across the world. Those who invest in the Bitcoin hope the value goes up and that they can exchange it for dollars and become rich. This is the crazy thing about cryptocurrencies.
Cryptocurrencies should not be allowed for sure because of the anonymity concept. India has embarked on a drive against black money, and demonetisation was an aggressive, though failed, move to control its growth. Tax authorities are hammering away at all the sides of the door to stop leakages. There is already a lot of round-tripping in foreign investment with Indians comfortably channelling their dollars through foreign portfolio investments (FPIs) which are registered in tax havens and SEBI is fighting to plug these leakages. In such a situation, having private players put their money in cryptocurrencies is not acceptable.
With this being the backbone of the ideology, the position here is that cryptocurrencies should not be allowed, and, as a corollary, should be made criminal unless all transactions are revealed in tax declarations. Why?
First, people who invest in a cryptocurrency cannot be traced and hence the entire effort at audit trail disappears. The charm of being anonymous is counter to the government’s drive to get citizens reveal the last rupee in their savings bank account! Are the originators/investors of such currencies prepared for this?
Second, drug money can easily be channelled into cryptocurrencies without a trace. Such cartels are already using substitutes such as foreign currency and gold for these transactions. Cryptocurrency makes it easier as it is technology-based without any formal transfer of currency.
Third, if people invest more here, the overall financial savings in the country will fall which can be used for productive purposes. This follows from the fact that India has moved towards lowering interest rates to ensure easy borrowing, much to the chagrin of savers, who today are venturing out to the stock market and enhancing their risk. Cryptocurrencies would be another tempting option especially so as one would not be traced, and taxes need not be paid.
Fourth, investing in a cryptocurrency is like doing the same on a fictitious base. While it is true that there are over 4,000 cryptocurrencies in the world, most do not have players and the Bitcoin is the leader in every way with no real competition. This is so because there has to be acceptance for any such currency to flourish. The enticement to make money has evidently led several Satoshis to start their own currency, which, fortunately, have not gained traction as this would have created chaos in currency markets. Even products such as gold or diamonds get value from scarcity (and more importantly people accept the high value, unlike the humble product called water which is more precious but has little value) and are tangible and accepted by all because there are owners of the metals. Cryptocurrencies are created out of thin air and the roulette table is set in motion.
Fifth, allowing unknown currencies denudes the power of the central bank. Just think of RBI increasing interest rates to curb demand, but people use the Bitcoin to support their demand without the knowledge of the central bank.
Sixth, if cryptocurrencies are used as a medium of exchange, it rubbishes the concept of a currency. Today, Indians have to use rupees and cannot use forex, which has to be surrendered to the central bank or else violate FEMA regulations. In such a situation, a cryptocurrency will be a parallel currency, which is not acceptable. In the US, there are several establishments that accept the Bitcoin.
Last, if cryptocurrencies are used just as an investment option (assuming we don’t mind people anonymously holding it without letting tax authorities know about their wealth), we should also allow betting on cricket matches where at least there is physical money being transacted.
There are very strong reasons, hence, for not allowing the use of cryptocurrencies. In fact, all such transactions should be made illegal and a criminal offence. If at all it is permitted, there has to be a 100% audit trail, which, then, probably will defeat the purpose of holding such a currency. The government is already fighting a battle on the social media that has been interpreted as being misused in the context of the legal provisions that are there. Allowing a parallel currency system is, therefore, antithetical, besides being a danger.
RBI has spoken about considering an official Indian digital currency. This is complicated because a government or a central bank cannot be having a rupee and also a cryptocurrency given that there has been expansive progress made in digitisation. Digital transactions have caught on which are denominated in rupees and this supports the growth taking place in the country. More digital transactions obviate the need to use banks and adding another cryptocurrency in parallel will not serve much purpose. In fact, it can create confusion. Besides, the essence of a cryptocurrency is to have a paradoxically limited but unending stream of coins being generated—while the sum is fixed, the amount available disproportionately falls with every passing period. This helps to give value for scarcity. A central bank floating a cryptocurrency cannot use this ideal when facilitating transactions in an economy.
The fight against black money is still on and tax data does not show that there has been encouraging success in this area. Under these conditions, it is best to keep away from cryptocurrencies and illegalise the same. An official cryptocurrency, too, is not warranted as it can create a lot of confusion and unease amongst citizens.
The author is Chief economist, CARE Ratings, and the author of ‘Hits & Misses: The Indian Banking Story’. Views are personal