Why it’s time SEBI spoke out on bitcoin

There is no doubt that cryptocurrencies such as bitcoin, litecoin and ethereum have caught the fancy of the rebellious set who want to display their distaste for the established order by dabbling in these assets. A digital currency unregulated by any central bank or government, created and managed by the masses, and accepted globally appears to be a godsend to this set.

While digital currencies could be the future of financial payments, due to the relative ease in cross-border transactions, lack of regulation has led to misuse of the currently available cryptocurrencies for money laundering, narcotic trades and terrorist activities. Besides, extremely volatile movements have made them unsuitable as a store of value too. It’s for this reason that many central banks, including the RBI, have clamped down on usage of these currencies.

But the trouble is that despite the Finance Minister ruling out acceptance of bitcoins as a medium of exchange in India in the Union Budget and the RBI disallowing banks and other institutions from servicing these trades, the interest towards these assets continues unabated. The sharp tumble in the value of bitcoin , from the $19,000-peak in December to $5,922 in February this year, has also not perturbed these investors.

Of greater concern is that many of those investing in bitcoin and other currencies do not appear to be aware of the risks associated with assets traded on unregulated exchanges. Further, there are few fly-by-night operators trying to make the most of this muddled understanding by floating Ponzi-like schemes.

It has, therefore, become exigent that Securities and Exchange Board of India (SEBI) states its stance regarding cryptocurrency trading clearly.

Not a currency

There was initially a tussle between SEBI and the RBI about who should regulate cryptocurrencies. SEBI felt that since bitcoin et al postured as an alternative currency, the RBI should regulate them, while the RBI felt that they were mainly being bought for future capital gains and, therefore, were an asset class that needed SEBI’s supervision.

The Finance Minister spoke on behalf of the RBI during the Budget presentation, stating that cryptocurrencies cannot be used to buy or sell goods or services in India; they are not legal tender. He thus put a stop to speculation that the rupee can be displaced by these assets. But this is the easier part as, unlike Japan, no retail outlet in India or any Indian website accepts payments in bitcoins or other cryptocurrencies.

While earlier, the RBI had stopped short with issuing warnings about the risks involved in dealing with cryptocurrencies, it stuck its neck out in the recent monetary policy, laying down that banks and other regulated financial institutions should not service cryptocurrency transactions. This move was mainly to check money laundering through these currencies and not to arrest trading in them.

SEBI’s turn to act

There are several reasons why SEBI cannot bide its time any longer in spelling out its stance.

Bitcoins were created in 2008 and they shot to fame in 2013 when the value of bitcoin went close to $1,000. While in the initial phase, few Indians mined bitcoins and stashed them away in wallets on their computers, there were no other activities involving crypto assets then. Those wanting to buy or sell bitcoins had to do so on trading platforms overseas.

But since 2015, numerous exchanges that enable trading in bitcoin and other cryptocurrencies have sprung up. Many entrepreneurs are also making Initial Coin Offerings (ICOs), a way of crowd funding through cryptocurrencies. The number of investors putting money in these assets have increased manifold.

The problem is that the entire ecosystem is operating in a regulatory vacuum. Cryptocurrency exchanges are not regulated by SEBI or any other regulator. It’s unclear if they have sufficient capital to guarantee the trades on these platforms, whether the promoters have the requisite qualification and governance track record, if the processes followed are aboveboard.

Of greater concern is the fact that some investors are being told that they will get a fixed return every month if they invest regular sums in some cryptocurrencies. This sounds dubious since fixed returns are next to impossible if money is invested in exchange-traded assets. There are no rules governing fund-raising through ICOs or the end-use of these funds.

SEBI’s inaction in this area is likely to cost investors dear, creating a problem similar to the NSEL scam, wherein the regulators kept tossing the ball to each other about who should regulate the exchange, which meanwhile wound-up, causing huge losses to many.

Regulatory framework

There appears to be genuine interest among many to own these assets and there is no reason why trading in these should be banned altogether. Such an act will only make the trades shift to the grey market or overseas.

But SEBI has to ensure that investors in these exchanges are protected. It can take one of the two routes. One, allow cryptocurrency exchanges to continue by setting out a regulatory framework governing these exchanges and by taking on the supervision of these trades.

An easier way to monitor these trades could be by allowing these assets to trade on the regular stock exchanges such as the BSE and the NSE, in the derivative segment. Bitcoin futures are being traded on CBOE (Chicago Board Options Exchange). A similar instrument can be allowed on the larger stock exchanges.

Once these transactions are routed through regular exchanges, price discovery could be better and Ponzi schemes will find it difficult to thrive. A digital currency floated by the RBI is also a good idea as it can be used for cross-border transactions.

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