Build the Blocks, don’t break the Chain

By Rajiv Banerjee

In a few days, the “Cryptocurrency and regulation of Official Digital Currency Bill, 2021″ will be presented in the parliament. It has set the proverbial ‘cat among the pigeons’ amongst crypto players in India. The bill seeks to prohibit all private crypto players in India, even as the Government is looking to create a framework of the official digital currency to be issued by the Reserve Bank of India (RBI). It resulted in retail investors going short once the summary of the proposed bill hit social media. The proposed bill comes amidst a frenzy of advertising and marketing by cryptocurrency exchanges. There were celebrity endorsements, full page print advertisements and primetime spots on television by players to enhance visibility and hopefully get the Government to take a more amenable view on cryptocurrencies in India.

Regulation – a Must
While the overall tone and tenor of the proposed bill remains to be seen, it is not difficult to see the reasons behind the move by the Government to create an official digital currency in India. Cryptocurrency by its sheer nature works on cryptography and without any intermediary. No Government in the world will allow another currency beyond the sovereign currency and it is something both parties across the table have come to accept. The Reserve Bank of India, sometime back, announced a pilot for Centrally Backed Digital Currency (CBDC), which has been reiterated by the Government in the proposed bill. A digital rupee, backed by the sovereign currency, will be beneficial, and could further fuel the rise of digital payments in the country. CBDC has to be seen in the light of becoming a digital avatar of the Rupee and not as an instrument to trade in cryptocurrencies; at least not immediately. But, as this place evolves, there exists the possibility of such a scenario playing out in the time to come.

Asymmetric information
Advocacy for regulations also comes from the gold rush that is being witnessed in this space. With glamourous brand ambassadors, advertisements claiming safety and promising better returns than traditional instruments, it is an alluring prospect for retail investors to see cryptocurrencies as a quick money-making instrument. The truth, however, is cryptocurrencies backed by blockchain is constantly evolving. And retail investors in India are yet to acquire a certain level of understanding of the ebb and flow of the cryptocurrency market. The frantic selling of cryptocurrencies in India that followed with just a three-line mention on the proposed bill is an example of the tenuous relationship between investors and cryptocurrencies. Such scenarios are ripe for potential market failure due to asymmetric information, which the Government is cognizant about. Regulations will also separate the wheat from the chaff, thus ensuring only serious long-term players are in the game. Of course, in any arena, there will be fringe players who will look to make a quick buck by enticing gullible investors, but regulations will mean there are certain rules of the game, which ring-fences a large portion of retail investors.

Prohibition Yes, Ban No
Cryptocurrency players surely are waiting with bated breath to see how the line ‘prohibit all cryptocurrency players in India’ unravels in the coming time. Players are drawing confidence from the fact that considerable progress has been made from an outright ban, a few years back to prohibiting private players. Sure, the RBI has vociferously raised concerns and rightly so, but the Government would intend to regulate the market, like for example the capital markets, by creating certain thresholds to operate. This is to ensure that the foundations of the market are strong.

One assumption is that Government may ban or prohibit private cryptocurrencies, where transactions are hidden and therefore difficult to trace, unlike a public cryptocurrency, that has elements of traceability and will therefore be permitted.

Blockchain as a technology holds promise and is already in use, but cryptocurrency in the realm of crypto technology is yet to transit from the perception of a fad to a serious instrument. For all the numbers bandied about, there seems to be serious retail participation for now. But it doesn’t take much for a bull run to turn bearish, particularly in a space, which is evolving and still very much shrouded in complex and technical jargons. In the coming time, the proposed bill will hopefully pave the way for intervention by the Government to prevent market failures and ensure it is a market with many players, which paves the way for market equilibrium between demand and supply. The market will decide which players will stay and who falls by the side. And players, on their part, will have to play a pivotal role in educating and informing the public on the pros and cons of investing in cryptocurrencies.

Rajiv Banerjee is a senior communications professional and is currently pursuing an advanced management program in Public Policy from ISB Hyderabad. Views expressed are personal.

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