RBI governor still has not thawed on ‘private’ cryptocurrencies — compares crypto hype to ‘tulip mania’

RBI governor still has not thawed on ‘private’ cryptocurrencies — compares crypto hype to ‘tulip mania’
Reserve Bank of India (RBI) continues to remain wary of cryptocurrencies and their impact on India's financial stabilityIANS/Canva/BI India
  • RBI governor Shaktikanta Das claims that cryptocurrencies have no underlying value, not even worth a single tulip.
  • In comparison, India’s upcoming digital rupee will carry the same liability of the RBI as paper currency.
  • Das reiterated that private cryptocurrencies, such as Bitcoin, threaten the apex bank’s ability to maintain financial stability within the country.
India’s central bank continues to be apprehensive of cryptocurrencies. Reserve Bank of India’s (RBI) governor, Shaktikanta Das, described cryptocurrencies as having no underlying value — “not even a tulip” — during the monetary policy press conference on February 10.

Private cryptocurrencies, or cryptocurrencies, which have currency-like characteristics, will undermine RBI’s ability to deal with issues of financial stability.

Statement by RBI Governor Shaktikanta Das during the monetary policy press conference on February 10

RBI’s Executive Director, T Rabi Shankar, clarified that, unlike cryptocurrencies, the country’s central bank digital currency (CBDC) will carry the same liability of the central bank. The digital rupee will be a convertible to paper currency at a 1:1 ratio. The only difference between the CBDC and paper notes would be that one is digital while the other is physical.

Digital rupee will be issued by the RBI, it will carry the same liability of the central bank. Cryptocurrencies are privately created products.

Statement by RBI Executive Director T Rabi Shankar during the monetary policy press conference on February 10

What was tulip mania?

The hype around cryptocurrencies has often been compared to the ‘tulip mania’ of the 17th century, which happened in Holland. It is one of the more famous market bubbles and subsequent market crashes of all time.

Long story short, speculation drove up the drives of tulip bulbs to all-time-highs — which was around $750,000 at its peak in today’s value, according to author and journalist Charles Mackay — before the market finally fell apart with buyers declaring they simply could not make payments.

One doesn’t even need to go as far back as the 17th century to see the pitfalls of overly inflated assets. The 1990s ‘dot com bubble’ and the more recent 2008 global financial crisis are other examples of how a boom in consumerism has led markets into disarray.

RBI has no empathy for cryptocurrency traders

Das also told the press that traders should be aware that any investments that they put towards cryptocurrencies are “at their own risk” — a sentiment that Das has reiterated multiple times during this tenure at the helm of the RBI.

However, this time around, the warning comes on the footsteps of the Indian government announcing a 30% tax on all transactions of ‘virtual digital assets’ as well as a 1% tax deducted at source (TDS).

While industry participants, like exchanges, decentralised finance (DeFi) startups and non-fungible token (NFT) marketplaces, have welcomed the news, they are also wary that the rate may discourage the rallying investments happening in the space. A tax rate of 30% is currently applied to gambling and lottery winnings, which has led many to interpret that the government views cryptocurrencies as a speculative asset, in line with the RBI governor’s comments.

Indian Finance Minister Nirmala Sitharman stated that just because India is taxing cryptocurrencies, it does not mean that they are getting any legitimate status — that will occur once the crypto bill is passed. However, the formulation of laws around this new emerging asset class has been caught in limbo for nearly a year.

It was initially scheduled for parliamentary discussion in February last year, and then again during the Winter Session. Both times, the legislation did not get introduced for debate owing to pending approval from the Cabinet, India’s highest decision making authority. Stakeholders are hopeful that it may finally surface for public purview sometime this year.

The RBI’s digital rupee is expected to go live before March 2023. The bank is currently only working with agencies within the RBI’s ecosystem — not external agencies are involved thus far. Moreover, there is no guarantee that the CBDC will be based on blockchain. “The technology choices are open,” said Shankar.

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