🚫 Can Crypto Be Regulated?Â
India desperately wants to regulate crypto. But is regulation possible?
Crypto. This one word has caused so much buzz in the country lately that no one really knows what to think of it. The Indian government has been wanting to regulate crypto for a long time now but the question is how? The RBI tried banning cryptocurrencies in 2018 by stopping banks from supporting crypto transactions. But the Supreme Court overturned the ban.
However, once again many rumours are floating about crypto bans.
But why is the government so concerned about crypto?
Let's look at what former RBI Governor Raghuram Rajan has to say about this.Â
The Crypto Problem
Crypto regulation is not a problem that is unique to India. Several countries have been looking at ways to control, monitor and regulate these volatile assets. Wondering why? Here are the three major reasons that Mr. Rajan also talks about:Â
These unregulated cryptocurrencies can be used for money laundering, tax evasion and other criminal activities. In fact, just in the past year Rs. 4,000 crores have been laundered using crypto.Â
The insane growth in crypto has made many believe that it is a must-have asset. And the star-studded ads by the cash-rich crypto startups have reinforced the FOMO. The hopes of becoming overnight millionaires have led many to put in their money without any proper research.
The widespread use of these cryptos may reduce the demand for rupee and cause financial instability.
But the risk of losing money or giving a channel for illegal transfers is not the only concern for Mr. Rajan. He believes that a crypto bubble has been created. And when this bubble bursts, a lot of people will be hurt.Â
Wait, what's this bubble?Â
Have you seen a soap bubble floating in the air? It shoots for the sky but is hollow inside. It delights everyone for a few moments. And then, just bursts with a prick. A financial bubble is just like that. The price of any asset increases without any rhyme or reason. All it has is people’s faith. A faith that can be taken away anytime because it has nothing to sustain.
Nothing to sustain? How can this be said about cryptos? Rajan says there are mainly two uses for cryptocurrencies, either they can be used as a store of value, like gold. Or they can be used for payments.Â
Now, most cryptos are currently being used as a store of value but there is nothing fundamental that gives them this value.
Think about it, what exactly is driving Dogecoin and Shiba Inu prices? What gives them value? It's mainly Elon Musk's tweets and people's beliefs. But how long can this belief last? This is why most meme coin prices fluctuate wildly and some disappear completely from the picture after making headlines for a few days.Â
In fact, Rajan believes most cryptos will eventually perish, with just a few mainstream ones sticking along. After all, do we even need over 6,000 cryptos for payments or for investments?
His words do have merit. Since 2009, over 2,000 coins have disappeared. Many of these also include scam cryptocurrencies like the Squid Game crypto which duped investors of $2.1 million before completely vanishing. These scam-coins have become like the modern-day chit-fund scams.
This is exactly why the government wants to regulate crypto. Looks logical. Then, what's the problem?
Rajan believes the problem is that most regulators don't really understand crypto well yet. And even if they do, with a new crypto cropping up every single day, regulation is not practically possible.
Most of these cryptos are not well-publicized also. So, there's no point regulating a few and not regulating the others. This will just cause more confusion among the public.Â
For a second let’s assume that the RBI manages to regulate all of these cryptos. This will create another problem. Saying that cryptos are regulated may cause people to believe that it is safe to invest in them. Not the kind of signalling that RBI is looking for.
What can a central bank do then?
Ban cryptos? According to Rajan, this is not an option either (crypto holders happy now?). Given the size of the industry, it's not practical. Also, Rajan believes that if people see that cryptos are around even after the ban, it might entice more people to invest in them. After all the moment something is forbidden, we want it even more.
But if regulating and banning doesn’t sound like a good idea, how to tackle cryptos?
Coming out with your own. Yes, RBI can create a central bank digital currency (CBDC) which is controlled and regulated by the government. (Here's our detailed explainer on CBDCs). How will this help? Many people have flocked to cryptos because they offer data privacy. If a regulated currency can address this issue, they might not opt for a more volatile asset.
But human greed knows no end. Most people view these cryptos as high-end lottery tickets. This is their one shot at becoming a millionaire. Why will the boring CBDC interest them?
Also, if you can’t kill your rival, become so strong that your rival loses their spark. If the government ensures rupee's stability, controls inflation well, it will prevent people from choosing cryptocurrencies as their main mode of transactions.Â
But will these options be enough? Can the government do anything else? Or is crypto a benevolent demon that no one can now control? Let us know your thoughts about crypto in the comments.
Share this with your friends via WhatsApp or Twitter and help them declutter news from noise! See you tomorrow :)
If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇