As Securities and Exchange Commission (SEC) in the US flagged off 11 exchange-traded funds (ETFs) on spot price of bitcoin earlier this month, many hoped that it may not be long before India joined the party. RBI has been maintaining that cryptos have no intrinsic value. Of course, that view is restricted to its role as a currency, not the blockchain technology that drives its use as an exchange of value.
Why does crypto not qualify as currency? Because its nature disqualifies it to be treated as one. This ‘exotic stuff’ is deemed as being against how people and societies govern themselves as a nation-state. So, keeping the continued view of organisational primacy of the nation-state, there’s nothing on the horizon to believe the current position on crypto will be changing soon in India.
In a nation-state, the issue of currency is a state function, and it’s done through the central bank. Countries, in general, prohibit the use of currencies issued by other nations for transactions in their territories. A monopoly position is one that hardly any central bank – and, by implication, a sovereign government – would want to give up.
Currency is also power of the state and of the political class. The 17 languages on rupee currency notes represent the collective power of states and the Centre. Politicians are in the business of controlling, not ceding. It would be naive to expect them to permit an anonymous unit to be used as currency.
Even under the existing monetary system, the state cannot claim to be in absolute control over economic activities. There is tax evasion, terror funding and other illegal activities. Tel Aviv’s decision to seize wallets containing millions of dollars of cryptocurrencies allegedly routed to Hamas, for instance, is sufficient reason to argue against non-fiat money in faraway India. It is the possibility of terror-funding and tax evasion that could nullify whatever progress that may have been made with demonetisation.
Throw in the most potent fallout of the Ukraine-Russia conflict – weaponisation of the payments system by the developed world. The squeezing of Russian finances and freezing of hundreds of billions of dollars in assets have made states realise how vulnerable they can be, rather than how convenient it is, to use one global system whose control lies in the hands of a few.It is not just the bigger financial system but also the social obligations of the state and regulators. In a country where shops in some areas are ordered to close by 10 pm for ‘better law and order’, and laws prohibit gambling, crypto losses could also backfire on legislators for not providing safeguards.Yes, it may be argued that people love to gamble in a country where kingdoms have been lost and won on games of dice. But the regulatory mood now is not to risk modern-day encores of such epic wagers.
SEC, which has now permitted ETFs, had brought in lawsuits against Binance Holdings and Coinbase alleging violations. FTX, a crypto exchange, went belly up due to fraud, with customers losing billions of dollars.
Anonymity of holders and trading is a headache for regulators. Few know the actual owners, and whether the trading volumes declared are genuine. One study found illegal wash trading accounted for an average 70% of trading volume on unregulated crypto exchanges.
Bitcoin has trades between $29,250 and $67,734, and plunge to as low as $15,631 by November 2022. It is back at $39,000. But, remember, it is down 20% since ETFs were permitted, which is puzzling as it should have rallied with new fund flow rather than crash.
Can the rupee, South Korean won or Chinese yuan afford that kind of movement? The basic test of any currency is satisfying four criteria: medium, measure, standard and store. Bitcoin probably fails on three of the four counts.
Some argue that even stars like Elon Musk have decided to accept bitcoins for their products. But here’s the catch – he did not say he would price his cars in bitcoins. Soon enough, Musk stopped citing environmental degradation due to bitcoin mining.
When SEC chair Gary Gensler signed off on ETFs, he said, ‘Remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.’ Unlike him, RBI governor Shaktikanta Das is very unlikely to change his tune. Soon after crypto ETFs became a reality, from Davos, Das yet again underlined the difference between the technology driving crypto and speculative activity based on it.
Any regulator anywhere in the world market may decide to green-flag crypto investments. But Indian investors should bury hopes of cryptos getting a legal status in payments or investments.