The RBI has been openly against cryptocurrencies for a long time now. But is this a good move? Although it is known that the government hates cryptocurrencies, completely cracking down on them might not be a great idea. Those who want to transact in the cryptocurrency space will do so one way or another. But cracking down on them so aggressively might push these transactions into the shadows and make them really difficult to track. This could be a bigger problem than the RBI might have anticipated.
RBI released its annual report on Aug 29. The report said, “Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased use of cash,”. “Possibilities of migration of crypto exchange houses to dark pools/cash and to offshore locations, thus raising concerns on AML/CFT (anti-money laundering/combating the financing of terrorism) and taxation issues, require close watch.”
Effects of the ban
On 6th April, financial institutions were asked to stop facilitating cryptocurrency related transactions. They were given a time limit of three months for the same. But was this enough to stop the use of cryptocurrencies completely? Absolutely not. As history has shown, if you strongly oppose something, you give it even more notoriety. Users have discovered workarounds to eliminate the use of bank accounts. They now use peer-to-peer trade and crypto-to-crypto business model to bypass the ban.
Peer-to-peer transactions work by the exchange connecting the buyer and seller as the mediator. But you could also trade one cryptocurrency for another. That’s the crypto-to-crypto route. Exchanges are also planning to jump ship and move their offices out of the country. It’s a much better move to set up offices in a more crypto friendly nation. And when that happens, the RBI stands to lose track of the money that goes in and out of the system.
The exchanges blame the RBI for this supposedly stupid move. If the RBI chose to regulate the crypto market instead of just opposing it, this situation could have been avoided. And to be honest, I couldn’t disagree.“The exchanges have been following a robust know-your-customer procedure and enforcing only bank-related transfers which could have helped to keep a tab on the money trail,” said Praveen Kumar, chairman, and CEO of Belfrics.
But we also cannot complete disregard RBI’s reasons for the crackdown. One big reason being the protection of customers. “Though cryptocurrency may not currently pose systemic risks, its increasing popularity leading to price bubbles raises serious concerns for consumer and investor protection, and market integrity,” the report said. We all know what happened to the bitcoin, the cryptocurrency fell hard and a lot of people lost their money. This is exactly the kind of situation that the RBI wants to avoid. But if an investor fully understands the risks related to cryptocurrencies, it should be his choice to make the move. Not the government’s.