When India’s Covid-19 pandemic was raging towards its peak in mid-May, Vitalik Buterin, the 27-year-old founder of Ethereum, donated cryptocurrency worth $1 billion to support pandemic relief work in India. Our astonished media didn’t know what to make of this: Some reported it as the single-largest philanthropic contribution to help Covid-afflicted Indians, whereas others thought it was a bit of a joke, especially since the cryptocurrency donated was Shiba Inu, one of a growing number of “meme digital currencies”.
Many Indians are understandably sceptical about the very idea of crypto-currency. How can there be any kind of currency that isn’t backed up by a sovereign state and a public institution like a central bank? But there is, and it’s valuable enough to shake up financial markets. The pioneer cryptocurrency, Bitcoin, which traded at just $ 0.0008 in 2010, commanded a market price of just under $65,000 this April. Many newer coins were introduced since Bitcoin’s launch, and their cumulative market value touched $ 2.5 trillion this May. Within a span of just over a decade, their value has surpassed the size of economies of most modern nations.
China’s recent crackdown on cryptocurrency had far-reaching consequences. An astounding trillion US dollars were wiped out from the global cryptomarket within a span of 24 hours. Remarkably, this is a reversal of a fraction of the gains made by this sector since the onset of Covid-19 in January 2020. The “cryptomarket” grew by over 500 per cent, even while the pandemic unleashed global economic carnage not seen since the Great Depression. Within two days of the China-provoked crash, the value of the cryptomarket again recovered by over 10 per cent.
This kind of extreme volatility has always been a concern for regulators and investors alike. When Satoshi Nakamoto created the most popular cryptocurrency, Bitcoin, in 2008, as a fully decentralised, peer-to-peer electronic cash system that didn’t need the purview of any third-party financial institution, he was responding to the lack of trust in the existing banking system reflected in the global financial crisis that year. Initially, governments did not know how to react, but as with the growth of the internet, the advent of cryptocurrency has been one of the extraordinary stories of modern economic history and no country can remain untouched by it.
In India, as always, the reflex action is to bar what you can’t understand, ban what you can’t control. Law enforcement and taxation agencies have clamoured for a ban, expressing wariness of these being used as instruments for illicit activities, including money laundering and terror funding. In 2018, the Reserve Bank barred our financial institutions from supporting crypto transactions — but the Supreme Court overturned it in 2020. Yet, Indian banks still block these transactions, and the government has circulated a draft bill outlawing all cryptocurrency activities, which has been under discussion since 2019.
Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams. But like all effective regulation, it needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve. Nobody in India has been able to tick these boxes, and we’re in danger of missing out in the global race altogether.
Despite there being no announced policy in place, the Reserve Bank has announced the launch of a private blockchain-supported official digital currency, similar to the digital Yuan. India is increasingly mimicking China’s paradoxical attempt to centralise a decentralised ecosystem. Our government is trying to decouple cryptocurrencies from their underlying blockchain technology, and still derive benefit. Unfortunately, this is impractical, and shows a lack of understanding of this…