Stop waffling on cryptocurrency policy

| Updated on: Dec 06, 2021

Ugur Hakan Cakan, co-founder of Cointral, holds a representation of virtual currency Bitcoin at his cryptocurrency exchange shop in Istanbul, Turkey April 27, 2021. Picture taken April 27, 2021. REUTERS/Murad Sezer | Photo Credit: MURAD SEZER

The Centre needs to quickly finalise its policy on cryptocurrency trading

The delay by the Centre in formulating a policy regarding trading and transactions in cryptocurrencies is leading to a tricky situation for investors in these instruments. Trading in cryptocurrencies such as bitcoin, etherium and litecoin is once again in full swing in various trading platforms in India after the Supreme Court lifted the ban by the Reserve Bank of India (RBI) on financial institutions facilitating cryptocurrency transactions last March. But a recent report in this newspaper indicates that crypto trading platforms and investors have been facing problems with some banks directing payment gateways not to process these transactions. Such indirect curbs on crypto transactions only increase the uncertainty for the entire ecosystem.

The RBI had directed banks and other financial institutions to stop processing cryptocurrency-related transactions in April 2018, following which activity on crypto trading platforms had come to a virtual halt. However, investor interest is once again growing following a stellar rally in these assets over the past year. With the Bloomberg Galaxy cryptocurrency index up 272 per cent in 2021, it is not surprising that many investors want to allocate some money to these assets. Many domestic trading platforms are also advertising aggressively to attract investors, thus resulting in higher trading volumes. The central bank is certainly justified in being worried about the growing user base of these assets in the country. Cross-border money transfers done through cryptocurrencies are beyond regulatory purview and can be easily misused for money laundering, terror financing and so on. Also, with the Centre yet to decide if trading in cryptocurrency is legal or not, these platforms are operating in a regulatory vacuum which can be dangerous for the system. Investors trading on these platforms have no recourse if any of these platforms default in settlement. There is also the larger question of suitability of cryptocurrency for investors, given the price volatility and lack of intrinsic value.

The Centre needs to address all these issues in its policy; for a start, it can make the Cryptocurrency and Regulation of Official Digital Currency Bill public. A total ban on trading in these assets will not work as it will result in shifting the trading to overseas exchanges. The Centre needs to frame rules to regulate the trading platform and make sure that they are created and run by credible promoters with adequate networth. The platforms need to implement strong risk management processes including creation of settlement guarantee funds. These cryptocurrencies are however not suitable to act as a medium of exchange and the RBI’s digital currency project must be expedited to meet this demand.

Published on May 14, 2021
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