Banning Cryptocurrencies Most Advisable Choice For India: RBI's T Rabi Sankar

Cryptocurrencies are like Ponzi schemes, "may be even worse", said Reserve Bank of India deputy governor T Rabi Sankar.

<div class="paragraphs"><p>A novelty bitcoin decoration on a Christmas tree. (Photographer: Andrey Rudakov/Bloomberg)</p></div>
A novelty bitcoin decoration on a Christmas tree. (Photographer: Andrey Rudakov/Bloomberg)

Cryptocurrencies are like Ponzi schemes, "may be even worse", said Reserve Bank of India deputy governor T Rabi Sankar, arguing that banning these tokens may be the "most advisable choice open to India". Arguments suggesting that cryptocurrencies be regulated instead do not stand up to basic scrutiny, said Rabi Sankar in a speech on Monday.

"They threaten the financial sovereignty of a country and make it susceptible to strategic manipulation by private corporates creating these currencies or governments that control them," said the deputy governor.

All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India. We have examined the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny.
T Rabi Sankar, Deputy Governor, RBI

Countering arguments that cryptocurrencies can be seen as assets if not currencies, Rabi Sankar said that allowing these tokens as assets would allow them to be used as "stores of value".

"'Store of value' demand is a more substantial source of demand for a currency than transaction demand," said Rabi Sankar, pointing to a similar comparison within bank deposits where time deposits are far larger than demand deposits.

The deputy governor went on to argue that seeing cryptocurrencies as a story of value is fallacious as the "value of crypto assets rests solely on the expectation that others will also value and use them".

Rejecting the notion that India should avoid a ban on cryptocurrencies because advanced economies have not done so, Rabi Sankar said India is not similarly placed as advanced economies when it comes to cryptocurrencies.

"We should particularly be alert to the possibility that these private currencies can be used for global strategic control," he said. "If, for example, some private currency substantially replaces the Rupee, the corporate which manages that cryptocurrency (or the country which has control of that corporate) can practically control India’s economic policy."

Rabi Sankar also dismissed concerns that a ban at this stage would hurt a large number of Indians who have already invested in cryptocurrencies.

"Data informally gathered in November seems to indicate that crypto investments by Indians is nowhere near to being significant," he said, adding that the pace of growth could make it a concern in the future.

This data showed that four out of five investor accounts held investments of less than Rs 10,000, with an average holding size of Rs 1,566. Wealth loss, if at all it is a possibility, is likely to affect only a small fraction of these investors.
T Rabi Sankar, Deputy Governor, RBI

The deputy governor added that concentrated ownership appears to be a characteristic of cryptocurrencies. According to industry data, around 13% of all Bitcoin sits in the hands of just over 100 individual accounts referred to as “crypto whales”, he said, citing data from a news publication. "Such concentrated ownership, usually by creators or initial investors, in what is touted to be (or at least hoped to be) the alternative monetary system, would make that system prone to manipulation."

Reiterating the RBI's concerns, Rabi Sankar said that cryptocurrencies are not amenable to definition as a currency, asset or commodity.

They have no underlying cash flows, they have no intrinsic value; they are akin to Ponzi schemes, and may even be worse. These should be reason enough to keep them away from the formal financial system.
T Rabi Sankar, Deputy Governor, RBI

Cryptocurrencies have specifically been developed to bypass the regulated financial system, he said. "These should be reason enough to treat them with caution."

Rabi Sankar added that there have been arguments that cryptocurrencies should not be banned because a ban is unlikely to be effective. This is a "superficial argument", he said.

One might as well argue that drug trafficking is a rampant phenomenon despite a ban, and therefore drug trafficking should be legalised and regulated. If cryptocurrencies are banned, the vast majority of investors who are law abiding would desist from investing. Those few elements who would continue to invest will essentially be carrying out an illegal activity.
T Rabi Sankar, Deputy Governor, RBI

Such exceptions should reinforce the need for a ban, rather than invalidate it, he said.

Closing his speech, Rabi Sankar cited Adrian Chen who wrote in the New York Times in 2013 that "Bitcoin is built on a weird mix of speculative greed bolstered by a utopian cyberlibertarian ideology" and likened it to a digital gold rush.

"Indeed, hyperbole continues to characterise all aspects of the crypto world. Crypto messaging does not appear to be directed at the rational or sensible. Global advertisements with themes such as ‘Fortune favours the brave' is reflected somewhat in our very own ‘Lag ja re…kuch to badlega’," said Rabi Sankar. "It would serve us well if the understanding about cryptocurrencies goes beyond the hype and gets rooted in reason and pragmatism."