Why India’s central bank has no faith in cryptocurrencies

On the rise.
On the rise.
Image: REUTERS/Dado Ruvic/File Photo
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While bitcoin is scaling new heights and is embraced by heavyweights like Elon Musk, India’s central bank doesn’t seem to have faith in cryptocurrencies.

In an interview with business news channel CNBC TV-18 last week (Feb. 24), Reserve Bank of India (RBI) governor Shaktikanta Das said that the central bank has “certain major concerns about cryptocurrency” and its impact on financial stability. Das also said that he had conveyed his concerns to the Indian government, which is scheduled to table a bill in the parliament banning private digital currencies.

This statement of concern by Das can have huge ramifications for the crypto space in India. Just a year ago, Indian cryptocurrency exchanges were reeling under the effect of an RBI circular that asked financial institutions not to support digital currencies. While this circular has been overturned by the court, the shadow of a ban on cryptocurrencies in India still looms large.

Despite receiving endorsements from global financial institutions, why is bitcoin still viewed with suspicion in India? Are Das’ concerns legitimate?

Bitcoin is volatile

Sure, there is a grain of truth to the claim that cryptocurrencies are rivals of central banks as they are unable to control them like sovereign money. However, the concerns raised by the RBI governor aren’t completely unfounded.

For instance, the most prominent digital currency, bitcoin, has given stellar returns since its inception, beating all asset classes over a decade. But it remains a speculative bet.

Bitcoin doesn’t derive its value from any assets or earnings. Hence, the value depends purely on what an investor is willing to pay for it. As a result, its price can be easily swayed. The price of bitcoin spiked significantly on Feb. 8 after electric car maker Tesla announced it had bought bitcoins worth $1.5 billion. But in a few days, it dropped 10% after Musk said that the price of bitcoin seems high.

Volatility isn’t new to bitcoin. Even in the months of February and March last year, when the spread of Covid-19 and economic slowdown had rocked the stock markets, bitcoin plunged sharply.

This kind of volatility is obviously risky for retail investors who don’t have deep pockets to hold on to their losses. And the volatility isn’t exclusive to bitcoin. Other virtual currencies also have a similar trajectory.

The extreme volatility also means digital currencies aren’t the best mode of payment.

With its value fluctuating drastically in a short period, it can destabilize the economy, in which goods and services are traded for currency on daily basis. If the value of the payment changes frequently, it can create huge uncertainty for buyers and sellers.

Money laundering and security concerns

Another major concern for India’s central bank is the anonymity that virtual currencies offer to their investors. While the record of bitcoins is kept on an open ledger, the identity of the owner is concealed. This can create problems for financial institutions to track the flow of money. And hence cryptocurrencies could be used to transfer illegal money or evade taxes.

Besides the misuse of virtual currency, security is also a grave concern. While it is impossible to tamper with the ledger or key of digital coins, they can be stolen from the wallet of exchanges, which has happened in the past in India and across the world. A Delhi-based cryptocurrency exchanged had filed a complaint against its employee for hacking and stealing bitcoins from a wallet.

So, even as bitcoin continues to outperform other asset classes and has certain advantages, the concerns around cryptocurrencies are hard to ignore, especially for a regulator.