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HOW CRYPTO IS NOW MAKING A COMEBACK
Read more on - Polity | Economy | Schemes | S&T | Environment
- Rise and fall: Many Indian investors entered cryptocurrencies in 2017 and reaped huge gains, before steep falls arrived in early 2018. Then came the RBI order banning all crpytocurrencies (CCs) in India and the industry froze. Many started looking for opportunities outside India.
- What about 2020: The tumult seems to be ending now, as the pandemic brought new investors rushing into crypto. Investors now find CCs a good alternate store of value, beyond merely a bubble-prone asset. Payment major Paypal has now allowed CCs in its wallets, following the trend of corporates to hold crypto in their treasuries. It now seems that the radical shift is happening, where one day companies may accept CCs for retail payments.
- SC overrules RBI: In 2020, the Supreme Court overruled the RBI decision banning CCs, and now some banks are showing interest in CCs. A multi-state cooperative credit society is tying up with Cashaa, the London-based CC platform.
- Why are retail investors moving in: It's been a bad market for many due to low FD rates, depreciating currency and lacklustre stock markets. Indian CC exchanges are ramping up operations, sensing that many investors are now coming in for the long term.
- Boom brings biggies: Sensing that Indian CC markets may grow rapidly, global exchanges are keen on buying Indian ones, and even PE investors are coming in (Private Equity). In late 2019, India's largest CC exchange 'Wazir X' was bought by Binance. Today, daily volumes in India are around Rs.10 cr, and average retail investor puts in Rs.11000. Most investors are below 45 yrs of age. But Indian market is still quite small.
- Traders not investors: A large per cent of 'investors' in CCs in India are actually short-term traders. With an SIP-like structure, exchanges are trying to change that. The first burst of CC use in India was actually from the needs of freelancers who had to receive international payments, and regular channels for money transfers were too costly. But then many CCs were launched in 2017, and speculation started.
- Global situation: Many are taking a longer-term view, and a regulatory thaw is happening. The blockchain technology is so strong - especially for money transfers and contract enforcement - that wider adoption is happening. Seven top central banks have released a report on the principles under which central bank digital currencies (CBDCs) may be created. The CBDCs will complement, and not supplant, cash.
- The three worlds: Today, some countries oppose CCs, some allow them but do not encourage, and those that encourage CCs. South Korea and Japan are in the third category. China banned CCs, but allowed its companies to manufacture hardware for crypto mining!
- What about India: After the RBI ban in 2018, the govt. started work on a stronger criminal legislation on CCs. The draft law, based on recommendations of the Subhash Garg committee, is 'Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019'. The govt. wants to eliminate CCs from India altogether. But today, the Bill's author doesn't support an outright ban. He now wants to ban only 'CC as a currency' but wants to allow 'CCs to exist as an asset'. It's better to bring regulations than an outright ban.
- Frauds: When the boom period happened in 2017, many fraud Indian cryptocurrencies were launched, mainly as Ponzi schemes. Govt. was spooked. Experts say that 95% of ICOs are scams (Initial Coin Offerings). When PM Modi's twitter account was hacked and CC donations asked for PM NRF (National Relief Fund), the whole issue of 'CCs and crimes' was suddenly highlighted.
- KYC: Large CC exchanges do the Know-Your-Customer processes, but the industry has no regulator at all. So exchanges go bust, and vanish suddenly. CCs can be taken out of India easily, and stolen from accounts.
- Indian digital payments system: The explosion in digital payments - from NEFT to UPI - is a wonder, but now banks are resisting free processing of small transactions. That led to govt. anger on it. So, CCs may be the route RBI can use to process domestic payment at a low cost.
- DeFi: Decentralized Finance (DeFi) is a new application built on the back of CCs. These are self executing contracts such as loan agreements. Global attitudes towards CCs are softening, with the IMF neutrally talking about CCs. Maybe India should reconsider the blanket criminalisation approach.
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