India’s government has a strained relationship with currency, as seen five years ago in its misguided attempt to quell money and illegal activities that were wrongly earned through demonetisation. Now, as the prospect of a ban on private cryptocurrencies arises, could we be in for another shake-up that doesn’t quite live up to its intent? On Tuesday, it listed its Cryptocurrency and Regulation of Official Digital Currency Bill to be enacted in Parliament in this winter session. That said, the aim would be to “ban all private cryptocurrencies” but allow exceptions “to promote the underlying technology”. It will also include a framework for the Reserve Bank of India (RBI) to launch a digital currency. While its final form may yet be a sigh of relief from India’s cryptosphere, which has a lot at stake, for now it looks like the center is set to come down hard on blockchain-based tokens. Trading platforms and the like may have a bleak future, but that doesn’t apply to crypto. As the name suggests, they can continue to move past the enforcement radar.
Money can be changed and their global success has changed crypto tokens alike. Recall, it was demonetization that pushed bitcoin into social conversations, with tales of small fortune hidden for exclusive access via secret codes. Purchases may be tracked on open platforms, but the spread of the Internet around the world will still allow owners to secretly use or redeem their chips. As tokens issued outside the reach of our jurisdiction cannot be liquidated, outlawing them is likely to disrupt above-board crypto businesses but ultimately proves ineffective. Worse, should they exit our formal economy, we may remain in the dark about their impact on various inputs to economic policy. As for the ‘exception’ to enable blockchain-based value creation, while this seems like a worthy concession, it may be difficult for us to get a technical distinction for monitoring industry that is not overly arbitrary. The outright ban, thus, could end up as yet another case of overkill.
Aside from their potential abuse, a powerful argument against crypto is the erosion of our monetary sovereignty which may lead to widespread adoption of stablecoins in the times to come. As these tokens are tied to regular money, they can encroach on the role of the rupee and reduce the RBI’s space for macro management. This is a significant risk in the need for a mitigation response. Since the ineffectiveness of the crypto ban would be a weak defense of our fiat currency, our best bet would arguably be to allow such stablecoins to thrive so that intense market competition does not allow a single token to gain dominance. To contend with the scattered forces, a digital rupee issued by the RBI can be kept as the ‘real thing’ for online use. Official support will give it a unique advantage. If it is designed well, it can exploit the market need for a common standard to achieve domestic superiority. This will help prevent RBI from losing control of commercial conditions. Nevertheless, the ‘dollarisation’ of commerce seen in some parts of the world should be on a cautionary note. Digital tokens do not respect national boundaries, and therefore their widespread use would undermine our capital barriers. In turn, this would pressure the Reserve Bank of India to prevent the rupee from losing value within India and against currencies such as the US dollar. Thus a digital rupee would have to keep inflation low and stable to remain competitive. No one can say how all this will go. However, knee restraints are rarely successful. Let’s regulate crypto instead.
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