A retrograde step

The Reserve Bank of India's recent curbs on cryptocurrencies have far-reaching implications in India – for investors as well as those who want to focus on blockchain technologies on which virtual currencies, as cryptocurrencies are also known, are built.

Global cryptocurrency market reached unimaginable levels of over $500 billion within a decade, thanks to the stratospheric rise of bitcoin, the first virtual currency created in 2009 by an unidentified person, which rose from a meagre $0.3(Rs 19.41)per unit in 2008 to near $20k a piece in December 2017.During its historic dream run last year, it recorded a 20-fold jump from under $1,000 in early 2017.

The result. Early investors struck gold. Not the ones to lose a golden opportunity, Indians also got on tothe bitcoin bandwagon in a big way. However, such a meteoric rise of bitcoinnotonly spawned new rivals such as ethereum, ripple, etc, but also attracted attention of financial regulators worldwide. RBI curbs should be seen from this angle. But the apex bank acted cleverly.

Instead of banning the virtual currencies outright, it asked banks and financial institutions not to entertain any transactions related to them. It has given three-month time tothosebanks and financial institutions which are into this trade, to exit. That way, it wants to choke money supply to cryptocurrency transactions. That’s an indirect way of killing these high-tech currencies.

Though there is no accurate data on cyptocurrency trade in India, rough estimates put the market size at $2 billion with nearly 50 lakh investors. Post the RBI diktat, most of these investments are in danger now. Though investors have a three-month window to exit, it will be hard to find domestic buyers for bitcoins.

This amply reflected in the fact that the price of bitcoin plunged from a high of $7,000 to $5,000
after the RBI’s announcement. Further, uncertain future awaits 20-odd exchanges that facilitatecryptocurrency trading.Either theyshould shift their operations overseas or shut down forever.
It’s perplexing that RBI has taken this drastic step at a time when other countries are trying to figure out how to regulate cryptocurrencies.

One reason cited by RBI is that there is a high chance of people using cryptocurrencies for money laundering. But this virtual ban will further aggravate such problem as bitcoin investors may opt for peer-to-peer deals instead of using legitimate banking channels for their transactions. Moreover, India, which claims itself to be the powerhouse of technological innovations can’t function in isolation when it comes to virtual currencies.

Furthermore, ban on bitcoin and the like will hamper progress in blockchain technology which is considered by many as the secure technology for financial transactions.

Some reports indicate that RBI is mulling over launching its own cryptocurrency. That’s a good sign. But the existing cryptocurrencies have global appeal and are traded across the world. It’s unlikely India’s own cryptocurrency will replicate the success of bitcoin. Instead, it should evolve a credible mechanism to regulate the existing virtual currencies. Banning them is a retrograde step, to say the least.