Days after the Union Budget proposed taxing cryptocurrencies, which gave rise to apprehensions of legitimising them, an Reserve Bank of India (RBI) official has asked for a complete ban on such virtual currencies citing threat to macroeconomic stability.
On the argument that advanced economies (AE) have not resorted to banning such currencies, the deputy governor said it is in the interest of those economies not to ban cryptos because they are not a threat to convertible currencies (most cryptos are priced in dollar) as they are to rupee.
“Significantly, it might be of advantage to the AEs if cryptocurrencies replace emerging market (EM) currencies as that would give AEs a better strategic control on the EMEs,” Rabi Sankar said at the Indian Banks Association 17th Annual Banking Technology Conference and Awards.
On the issue that banning cryptos would lead to erosion of wealth of investors, the deputy governor said banning in India does not mean investors would lose money, because they can be provided with a reasonable exit. In addition, the investors of cryptos were fully aware of the risks involved, he said.
The deputy governor said data informally gathered in November seems to indicate that crypto investments by Indians is nowhere near to being significant as four out of five investor accounts held investments of less than Rs.10,000, with an average holding size of Rs.1,566. “Wealth loss, if at all it is a possibility, is likely to affect only a small fraction of these investors,” he said.
The deputy governor also refuted the argument that banning cryptocurrencies would affect the absorption of DLT technology in India.
“…creating native cryptocurrencies is just one way of implementing a blockchain; it can be viewed as just one use case of the blockchain technology. To argue that banning cryptocurrencies would stunt the absorption of blockchain technology is therefore akin to saying that banning human cloning would kill innovations in biotechnology or banning nuclear weapons would hurt nuclear physics as a discipline,” he said.
The deputy governor said that crypto-technology is underpinned by a philosophy to evade government controls as they have specifically been developed to bypass the regulated financial system.
“All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India. the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny,” he said.
Talking on the macro stability risks posed by such currencies, he said increased acceptance of cryptocurrencies would result in effective ‘Dollarization’ of the Indian economy, which could undermine the ability of authorities to control money supply or interest rates, as monetary policy would not have any impact on the non-Rupee currencies or payment instruments.
“When that happens, India loses not just its currency, a defining feature of its sovereignty, but its policy control of the economy. With loss of traction for monetary policy, the ability to control inflation would be materially weakened,” he said.
Rabi Sankar went on to add that credit creation in convertible currencies would be impervious to monetary policy, and in the extreme case where a major part of deposits and credit shift to cryptocurrencies, the result would be a weakened, even crumbling, banking system, impairing financial stability.
He also said that there are already indications that private cross-border flows are taking place in cryptocurrencies and if such a trend is legitimised, a part of the flows related to trade payments, personal remittances or cross border investments would be made in these cryptocurrencies.
“As they are non-reserve currencies, this could have adverse implications for India’s foreign exchange reserves, which lend stability to the external sector. Besides, such cryptocurrency payments can take place outside the ambit of capital account regulations.
“This would adversely affect the integrity of the capital account regime, as policy control on capital flows would be eroded. The consequence of this on foreign exchange reserve accretion and exchange rate management raises serious macroeconomic stability issues,” he added.