There’s a major new risk in town and it’s called crypto

Synopsis: Retail investors are the ones who’ll most likely suffer in the high-yield, high-risk Crypto market. Government should come up with regulations before its too late.

Introduction

Crypto products are being mass marketed in India without the oversight needed for investor safety. The crypto marketing campaigns have now reached even tier-II and tier-III cities.

How has discourse around Crypto evolved in India?

Role of RBI: The Reserve Bank of India (RBI) has been warning the general public since 2013 about crypto-products, calling them virtual currencies (VCs) in its communication. RBI, through a circular dated 6 April 2018, directed banks and other financial intermediaries not to deal with entities, either individuals or institutions, dealing in VCs.

Numerous government committees also examined these products and were divided in their opinion: some advocated an outright ban while others were ambivalent.

Supreme Court: In its March 2020 judgement, the Supreme Court ruled that RBI cannot direct banks to withhold services to crypto-exchanges, primarily because the central bank was unable to show that the “interface” with crypto-products had resulted in either harm or adverse effects for these financial intermediaries. The court’s three-member bench, though, refrained from either banning or endorsing crypto-products.

What are the related issues/concerns?

Crypto-exchanges have been aggressively advertising on all media platforms—print, television and the internet—without the necessary caveats or disclaimers. These exchanges must keep in mind the following issues:

Crypto is not a currency: Firstly, they must ask themselves whether it is proper to use the term ‘currency’ in their communication because crypto-products do not fit its classic definition. It is also dangerous because many investors might mistake it for legal tender backed by government, which it is definitely not. Public fiat monies fulfill the three functions of money: a store of value, unit of account, and medium of exchange. No single crypto asset, though, broadly fulfils all the functions of money.

Crypto-products are not assets: Secondly, in their rush for yields, retail investors might overlook the fact that crypto-products may not qualify as assets in the true sense of the term. Most crypto-products do not have any underlying commodity, product or cash-flows that can provide them with economic value; a crypto’s value is derived primarily from its shortage because mining crypto-products is a specialized undertaking.

High volatility and other risks: Thirdly, crypto prices are extremely volatile and can change rapidly without any valid economic reason, as witnessed in recent months. What is more concerning, especially for individual customers, is that crypto-tokens are typically stored in digital wallets which can be hacked and robbed.

Unregulated crypto market: Lastly, crypto-activity is unregulated in India and any mishap will negatively impact investors. While crypto-products are legal in India, they are not answerable to any authority. Also, it is also relevant to ask whether fast-mushrooming crypto-exchanges can actually be called ‘exchanges’ at all. They are not supervised by SEBI and their trade matching processes or settlement mechanisms are not well known.

Hence, in light of the above risks and a potential huge impact on retail investors, government must step in to carve regulation for the Crypto market in India.

Source: This post is based on the article “There’s a major new risk in town and it’s called crypto” published in Livemint on 13^th Sep 2021.