Shaktikanta Das, Governor of the Reserve Bank of India, has stated that private currencies such as cryptocurrencies pose a threat to the country’s financial stability. This criticism is meant to deter investors from investing as this asset class entails certain risks. He also mentioned that cryptocurrencies have no underlying value since they are not backed by any asset, not even a “tulip”.
No Assets Backing Cryptos, “Not Even A Tulip”
As an investor, it is my responsibility to inform you that you are investing at your own risk when you buy cryptocurrencies. Keep in mind that these cryptocurrencies don’t have any underlying assets. Not even a tulip, says RBI Governor.
Das referred to Tulip in the previous statement in respect of “Tulip Mania” of the 17th Century. During this speculative bubble, investors purchased enormous quantities of an object with no intrinsic value, jacking up the price to unprecedented levels.
In the post monetary policy press conference, RBI Governor said, As far as cryptocurrencies are concerned, the RBI’s position is clear. Private cryptocurrencies constitute a major threat to financial and macroeconomic stability, undermining RBI’s ability to handle financial stability issues.
The government proposed a 30% tax on gains made through cryptocurrency trading in the Union Budget of 2022-23, which was presented on February 1. This move had been viewed positively since it meant that the government had finally warmed upto cryptocurrencies.
Thus, the government has closed the possibility of an outright ban on cryptocurrencies, as pushed by the RBI. On December 29, the RBI published its Financial Stability Report, which outlined the various issues and concerns relating to private cryptocurrencies.
According to the FSR report, private cryptocurrency was a form of “illicit” financing typologies that continue to emerge, including the use of virtual-to-virtual layering schemes that attempt to further muddy transactions in an inexpensive and easy way”.
In addition, cryptocurrencies have played their part in financing terrorism. For these reasons, RBI believes that the government and regulators need to be made aware of the many risks associated with cryptocurrencies.
The institution asserts that one of the biggest reasons to oppose cryptocurrencies is the possibility that the asset could fund illegal activities, as mentioned above. However, another pertinent question is whether taxation will be sufficient to resolve these issues?
The RBI Governor is reiterating the point that taxing cryptocurrencies may not be enough to combat the various risks associated with digital assets.
While the government believes that crypto transactions should be taxed to ensure that the risks do not manifest, RBI opines that they should not. Risks do not fall just by taxing an asset. This warning by Shaktikanta Das is indeed a wake-up call for investors and policymakers alike.
