Reserve Bank of India Governor Shaktikanta Das recently said that the RBI has conveyed its “serious and major concerns” over virtual currencies (VCs) to the government. The so-called concerns over cryptocurrency are misplaced at best and smack of the central bank’s statist approach at worst.
On March 4, 2020, a three-judge bench of the Supreme Court had quashed the ban that the RBI had imposed on trading in cryptocurrencies like Bitcoin in April 2018.
On May 31 this year, the RBI had directed banks not to cite its 2018 ban as a reason to deny banking services to customers dealing in cryptocurrency. “It has come to our attention through media reports that certain banks/regulated entities have cautioned their customers against dealing in virtual currencies” by making a reference to the ban it had imposed, an RBI circular said.
So, it took almost a year for the RBI to realize, and that too from media reports, that the entities regulated by it still regarded virtual currencies as proscribed. This is surely not a mark of the banking regulator’s efficiency.
It directed the banks that following the apex court order, the earlier circular proscribing virtual currencies was no longer valid. The circular went on to add, “Banks, as well as other entities addressed above, may, however, continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.”
Banks continued to caution their customers against dealing in cryptocurrencies because the RBI, despite the SC verdict, has persistently campaigned against the innovation. In the last week of February this year, Das raised concerns over VCs. The next month he again said the RBI had major concerns. Then again in June. His opposition to cryptocurrency seems to be the zeal of an activist rather than the reservation of a statutory regulator regarding an issue.
So, the RBI remains hostile towards and suspicious of cryptocurrencies, which are digitally encrypted, decentralized, and not regulated by any central bank or government. Right from the beginning of cryptocurrencies in the 1980s, its votaries were anti-establishment activists whose distrust of central banks as well as governments was libertarian-like.
As one of them, Adam Back, wrote: “What we want is fully anonymous, ultra-low transaction cost, transferable units of exchange. If we get that going … the banks will become the obsolete dinosaurs they deserve to become.”
The parent of the first successful cryptocurrency, Bitcoin, is a mysterious, unknown figure by the name of Satoshi Nakamoto. He is said to have sent an e-mail in August 2008 to Adam Back, along with an attachment, a white paper.
According to Satoshi, “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency but the history of fiat currencies is full of breaches of that trust.”
He and other cryptocurrency enthusiasts overcame the problem by bypassing all central banks and governments. Bitcoin was born and became hugely successful, attracting billions of dollars in the last few years.
Yet, as evident from Das’ recent salvo at virtual currencies, the central bank is unwilling to accept this development. This does not show him and the RBI in a good light; the central bank starts looking like a Luddite, instinctively hostile to innovation. And like a control freak that can’t accept anything it can’t control (the government’s approach was similar to that of the RBI. It once planned a law to ban VCs). This is not much different from the Chinese attitude. It may be noted that China proscribes VCs.
On the other hand, many major democracies, such as the US, Canada and the UK, allow the use of Bitcoin. Even the tiny Latin American nation El Salvador with a population of 6.5 million, recently accepted Bitcoin as legal tender.
It is not that the RBI has nothing important to do. “Gross non-performing assets (GNPAs) on retail and MSME loan books of public sector banks rose to 7.28 per cent in June 2021 from about 6 per cent a year ago. The incidence of bad loans was lower for private banks with GNPAs at 3.32 per cent in June, up from 2.01 per cent year ago, according to CARE Ratings,” says a Business Standard report.
Another report in The Indian Express says, “Public sector banks are experiencing a sharp surge in the proportion of Mudra loans turning into non-performing assets (NPAs) following the impact of COVID on incomes and repayment capacity of borrowers, according to bankers and an analysis of available data from state-level bankers’ committees.”
These developments are not surprising, given the devastation the coronavirus has occasioned.
Then there is the issue of bank privatization, something urgently needed but, if it happens, will be hugely controversial. The good news is that Finance Minister Nirmala Sitharaman has made her government’s intentions clear over the subject. A couple of weeks ago, she said, “During the budget, a public enterprise policy was announced, wherein we had identified certain strategically important sectors and in them, the bare minimum presence of the government will be there. Banks, financial institutions, and insurance are identified as strategic sectors, which means the government’s minimum presence will be there in insurance.”
It would be worth its while if the RBI works in tandem with the government to smoothen the process of bank privatization.
Then there is a great deal that India has to do in the realm of financial inclusion. The recently unveiled RBI’s annual Financial Inclusion (FI) Index shows the country at 53.9, where 100 is the full financial inclusion score.
The RBI should focus on such urgent matters instead of crying like a bad loser on the issue of cryptocurrency.
The author is a freelance journalist. The views expressed in this article are those of the author and do not represent the stand of this publication.