Historically, at some point in time copper,
gold and/or silver coins had been legal tender in India; and in many other
economies as well. Traditionally in Indian society, these metals have enjoyed
acceptance as ‘sacred metals’ having religious, medicinal and economic
importance.
With the rise in its industrial usage, copper
may have lost its ‘precious’ status, but gold and silver still continue to
enjoy ‘precious’ status, even though these are no longer legal tenders in India;
and most other jurisdictions. With advancement of technology and globalization
of Indian socio-economic milieu, the ‘sacred metal’ aspect of gold and silver
is also diminishing gradually.
In past few years, the government of India has
made significant efforts to encourage people to own gold in non-physical form,
through sovereign gold bonds (SGB). These bonds offer interest income at the
rate of 2.5 percent annually, beside capital gains benefits to the holders. In
recent years, the digital gold has also been gaining popularity due to ease of
transaction and holding. This comes after many decades of discouraging the gold
for investment and consumption.
Cryptocurrencies (e.g., Bitcoin) are relatively
new phenomenon in the global financial ecosystem. Unlike their nomenclature,
these are not exactly currencies so far. Only El Salvador has declared Bitcoins
as legal tender; whereas there are some jurisdiction (e.g., China, Indonesia,
etc.) that have put a total ban on use of all cryptocurrencies as medium of
exchange.
To achieve ‘currency’ status, cryptocurrencies
would need to gain much wider and deeper acceptance; which usually comes with
time and awareness. Gold took centuries to gain wide acceptance as medium of
exchange and ‘valuable asset’ status. Few cryptoes may gain this status in next
few decades, simply because modern technology has made things much faster.
In India, the cryptocurrencies have gained tremendous
popularity in past five years. It is estimated that there are over 100 million
people in India owning one or more cryptocurrencies; the largest number for any
country in the world. This number is materially higher than the number of
people owning publically listed shares in India. The value of cryptocurrencies
owned by Indian citizens is estimated to be close to US$900bn.
The government has proposed to introduce a Bill
in the forthcoming session of the parliament to regulate cryptocurrencies. The
Bill titled ‘The Cryptocurrency and Regulation of Official Digital Currency
Bill 2021’, aims to “create a facilitative framework for creation of the
official digital currency to be issued by the Reserve Bank of India” and prohibit
all private cryptocurrencies in India, with certain exceptions to promote the
underlying technology and its uses."
Earlier, a high level inter-ministerial
committee had suggested ban on private cryptocurrencies in India, except any
virtual currencies issued by state. However, the government refrained from
pushing the legislation in the Budget session. It was felt that a balanced
approach is required in the matter, for which wider consultation with all
stakeholders is important.
The Standing Committee on Finance recently
highlighted many serious concerns over the obscurity of cryptocurrencies,
operations of crypto exchanges and impact on the economy.
The stakeholders like RBI, Finance Ministry,
Home Ministry, Blockchain and Crypto Assets Council (BACC) and industry and
commerce bodies, the CII and ASSOCHAM, etc. made detailed presentation to the
prime minister regarding opportunities and threats posed by cryptocurrencies
and the need for appropriate regulatory framework.
Most significantly, the BACC represented that
crypto assets could be treated as “utility”, “security”, “property tokens”, “intangible
commodities”, or “virtual assets” that would ensure that the usage of tokens
was governed appropriately and they were not confused with legal tender.
From the indications available so far, it
appears that the government is totally against the use of cryptocurrencies as a
medium of exchange (legal tender), but it supports the development and use of
blockchain technology. It is therefore likely that a regulatory framework may
be provided for ownership, transfer, sale and taxation of (select or all)
cryptocurrencies. In that case the permitted cryptocurrencies may be treated as
“capital assets” under the taxation laws.
It is also likely that the proposed legislation
may permit a digital currency based on blockchain technology, to be developed
by RBI or any other public agency. Obviously, such currency will not have the
traits like Bitcoin, which is a decentralized and distributed digital token
with finite supply. RBI’s digital currency will most likely be a centralized
currency with infinite supply, just like fiat currency. In simple terms, RBI’s
digital currency may be a dematerialized currency note that is delivered as a
book entry in the receivers’ account.
Therefore, a fiat digital currency should not
be confused with a decentralized and distributed cryptocurrency.
In every democracy, especially the socialist
ones, the governments have the natural tendency to regulate every innovation;
simply because most new innovations make few people richer than the rest. With
every new innovation, the fear of rise in inequalities also rises. The tendency
to overregulate the innovations is therefore usually driven by the concerns to
assure the majority of population that stays at the bottom of the pyramid.
A classic example of this was the attempt of
British government to ban the use of cars on public roads in early years of
automobiles. The argument was that this may have negative implications for the
employment of poor people running horse carts on streets of London.
The good thing is that there is no historical
evidence of a government regulation killing an innovative idea which was ready
for adoption by the wider sections of public. Expansion of organized retail is
a classic example in recent Indian context.
The dematerialization of securities is
inarguably the single most important reform in the history of Indian capital
markets. The idea was initially opposed by the market participants and
bureaucrats. Computerization of banks and stock trading were other ideas that
were not accepted easily by various stakeholders.
Failure to self-regulate is also a major
catalyst for the overregulation. Securities’ market in India was mostly
self-regulated for first 100 years. It was the colossal failure of
self-regulation during late 1980s and early 1990s that pushed the government to
intervene. BSE, a self-regulatory organization (SRO), that enjoyed more than
50% market share in a 29 players market till mid-1990s, is now contended with
less than 10% market share in 2 player market.
“Most of the cryptocurrencies may not pass the
test of time and fail, causing material losses to investors” is not a valid
argument against cryptocurrencies. During 19th and 20th
century, thousands of banks and insurance companies failed causing instability
in markets and material losses to investors and depositors. More recently, many
private airlines, telecom companies, infrastructure builders, private &
cooperative banks, NBFCs, HFCs etc have failed in India causing huge losses to
investors, lenders and the exchequer. Would anyone accept this failure as valid
argument for banning these activities in private sector!.
A well regulated market for cryptocurrency
could be a bad omen for demand for the traditional “valuable assets’ like gold
and silver. Arguably, the factors like popularity and spread of technology in
common man's life; rising fascist and communist tendencies due to worsening
socio-economic disparities; rise in electronic transactions (personal, social
and commercial) thus lower risk (less travel, less physical transactions &
deliveries); emergence of new articles of luxury to serve the vanity needs of
the affluent; stronger and deeper social security programs; demise of monarchy
and feudalism; popularity of spiritualism over rituals; dissipation of church
& temples, etc., are all leading to sustainable decline in traditional
demand and pre-eminence of gold. There is nothing to suggest that this trend
may not continue in near future.
The following table makes it clear that gold
and cryptocurrency are comparable assets in most respects. Some experts are
arguing that gold has “intrinsic” value whereas cryptocurrencies have none. In
my view, the intrinsic value of gold has developed over many centuries of wider
acceptance by the state and religion. This intrinsic value has been on the
decline for past few decades.
Insofar as the volatility is concerned, in past
two centuries, gold has seen many bouts of wild volatility, correcting over 50%
on many occasions. From December 1987 high of ~US$500/oz to February 2001 low
of ~US$250, Gold yielded a negative return of 50% over a period of 13yrs. Falls
of similar magnitude were rather quick during 1974-1976 and 1980-1982.
(An edited version
of this article was published at moneycontrol on 26 November 2021)
