The break down
The Indian Department of Economic Affairs published a comprehensive report on virtual currencies and recommended actions. Before we summarize our take on the committee’s report and its recommended actions, we wanted to highlight the key talking points from the report.
1. The committee views Distributed Ledger Technology (DLT), the foundational block for almost all blockchain projects and cryptocurrencies, in a positive light and aptly acknowledges the immutability and decentralization aspects of DLT as being value-additive in areas such as trade finance, mortgage settlement, etc.
2. The committee expressed its concern over the proliferation of cryptocurrencies. In its view, private cryptocurrencies (non-sovereign cryptos) do not have an intrinsic value and lack the attributes required for them to function as a real currency. The report also alluded to the extreme volatility in the prices of cryptocurrencies and cited that as a reason why it would not replace traditional fiat currencies.
3. The Committee endorsed the stand taken by the RBI (Reserve Bank of India) to ring fence institutions regulated by the RBI from cryptocurrencies, thus perpetuating the effective ban on fiat on-ramps. The Committee also recommends that all exchanges, people, traders and other financial system participants should be prohibited from dealing with cryptocurrencies.
4. While expressing concerns over the legitimacy of non-sovereign cryptocurrencies, the committee has an open mind regarding the launch of a digital sovereign currency (digital rupee).
5 .The committee recommended that various regulators examine the utility of DLT to improve the efficiency of and to determine fraudulent activities in many processes such as cross-border payments, low-cost KYC, land management system, etc.
We were hopeful that the regulator would take a slightly more progressive stance, for reasons that we had laid out in a recent Op Ed in the Economic Times, a leading Indian business daily. However, those hopes were put to rest with the current ruling.
Silver lining here, and it is a slim sliver of a silver lining – you can’t price uncertainty, but you can price risk. This clarification in the policy framework lays out at least in the near term what the prospects are going to be for crypto ecosystem stake holders in India. Also it is important to recognize that given the unique context that the Indian policy makers are in – fears around national security owing to the unique geopolitics, and potential political backlash around crypto black swan events, are going to be front and centre, irrespective of whether such extreme caution is warranted or not. This is what it is, we have to accept reality and move forward from here. We sincerely hope that the regulator will use this as a starting point for a debate, rather than as a final document, so that this evolves in a constructive fashion going forward.
There is enough language in the document to suggest that the regulator is in fact aware of this, and is indeed open to at least listening to industry and investor feedback, even if not necessarily prone to immediately acting upon it. Again, maybe clutching at straws here, but like with the Libra congressional hearings, the team of policy makers and regulators have really done their homework, and the document seems to indicate a surprisingly good understanding of the inner workings of DLT and blockchain and cryptocurrencies, especially for regulators.
Our earlier views on one dynamic are worth repeating. At the risk of generalizing, within these decision making bodies, the older generation, in the 50s and 60s typically struggle to come to terms with cryptocurrency, and though they might be in the minority, they have the deciding votes. It will take time to change these views, but change they will, and change they must, for reasons that we will dive into in tomorrow’s edition.