Regulating India’s Cryptocurrencies: The Power of the Eyebrow
When the Governor of the Bank of England was called out of BCCI’s financial wreckage by the Treasury Select Committee in 1995, he was asked to explain his approach to prudential regulation: how would he assert the Bank’s authority over a rogue institution like BCCI in the future? The Committee then sat open mouthed as the Governor explained that his secret weapons were his eyebrows: he would raise them if he disapproved, and he would arch them with particular severity if he really disapproved of what was going on.
No wonder BCCI got away with it for so long…
There was, to be fair, a seed of truth in what the Governor had told the Committee: the problem was, it was a hundred years out of date. In the past the merest suggestion of disapproval from the Empire’s Banker would have been enough to have the most hardened fraudsters quaking in their boots. But those days had long since gone by 1995, which is why the Governor’s comments proved to be so risible. Empires rise and fall, but such hints and dark suggestions can still have their place in modern financial systems, as recent events have demonstrated.
In particular, the seemingly throwaway comment by Indian Finance Minister Arun Jaitley, in the Union Budget Statement of 1 February: he said that the Indian Government did not consider crypto currencies to be legal tender or indeed currency at all, and that steps would be taken to prevent their use in financing “illegitimate activities”. If the current Governor of the Bank of England had made that same comment it would barely have been reported at all let alone raise an eyebrow: but it would seem the Indian Finance Minister has much bigger eyebrows these days.
The comment caused immediate shockwaves across global crypto currency markets (currently being encouraged in the United States, albeit with more enthusiasm in Chicago than Washington). Bitcoin took a stunning and immediate nosedive, losing 17% of its value in a day and falling to a third of its December value within a further two days.
Although Prime Minister Modi’s Government has since clarified that the Finance Minister was talking about cutting off funding for illegal transactions (as indeed he did), rather than the continued existence of the fifteen or so crypto-currency exchanges currently trading on the subcontinent, the fact is that the Reserve Bank of India has been issuing repeated warnings against investing in digital currencies for months now, pointing out repeatedly that they carry substantial financial as well as legal risks. So, the comments made in the Union Budget Statement (limited though they might have been) could actually point to future regulation of the sector in India.
Particularly so given some large Banks in India have already been working with the subcontinent’s crypto exchanges on their own versions of digital currencies so it would also seem counterintuitive to the wave of entrepreneurial energy sweeping across India at the moment, for the Government to rule out altogether regulating the sector in the future.
And at least if the Indian regulator does ultimately decide to step in and bring order to these evolving crypto currency markets, at least we know that his or her eyebrows will be big enough for the job.
While the government hasn't yet introduced any restrictions on digital currencies, the threat that it might do so has spooked the industry. India's central bank has also warned that those who invest in cryptocurrencies do so "at their own risk."
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