The Future of Blockchain and Crytpocurrencies in India

Cryptocurrency, Blockchain, Web3, HODL... Etc.

These terms have forced their way into our vocabulary in the last 2 years. So much so that the Reserve Bank of India routinely signals its intention to shut the whole thing down!

But why should anyone care about anything that’s happening in this space. As it is, we all know the entire space is riddled with scams and is at serious risk of being declared "illegal" by various authorities.

The aim of this article is to attempt to condense it all into a few broad points of discussion that the reader can reference while engaging on these topics.

In October 2022, the RBI released a concept note on Central Bank Digital Currencies (CBDCs) outlining its thoughts on the definitions of CBDCs, how they would be implemented, what value add would they provide, their effect on the formal Indian Monetary System and so on.

To start with, the RBI has acknowledged that Central Banks all over the world are looking into Central Bank Digital Currencies (CBDCs) are assessing the benefits and drawbacks of introducing CBDCs as part of the formal Monetary System.

In the note, the RBI explains how a CBDC is structured, what it would entail to the formal monetary environment, benefits and possible constraints in execution. Furthermore, it also quite explicitly articulated its concerns regarding private cryptocurrencies and why they are "dangerous" to the formal monetary system and to speculators.

In a nutshell, the various points are as follows

  1. General benefits of CBDCs - predominantly from an operational cost point of view as well as considering potential reduction in intermediary costs. Essentially, cost of printing money would be reduced and also, the role of banks as intermediaries would decline and hence those costs would also disappear.
  2. CBDC Design - Whether the CBDC would be for wholesale (institutional) or retail use.
  3. Issuance models - Whether the Central Bank would be the sole issuer and distributer or would it involve Banks as intermediaries (IMO this is against the basic principles of an intermediary less digital currency)
  4. Token or Account Based CBDC - whether the CBDC would be like our current physical cash system (whoever has the note /token at any time, owns it) or would it be based on credit balances thereby requiring an intermediary to verify holders (again going against the core principles of an intermediary less financial system).
  5. Whether the CBDC would be interest bearing or not? - I confess this aspect is something I had not considered at all, but the RBI has thought about using CBDCs in this form to further develop Monetary Policy Ideas.
  6. Anonymity - Whether the CBDC transactions should be anonymous to all and whether it can be possible in the first place?

But why is the RBI going to such lengths regarding CBDCs? Also, why has RBI Governor, Dr. Shaktikantha Das gone on record several times describing crypto as dangerous to the formal monetary system and highly risky?

This next part isn’t really that technical but aims to articulate a few points raised by the RBI and my counter to them.

Well, firstly, I describe the elephant in the room.

Cryptocurrency and Blockchain (to an extent IMO) is about counter culture.

The underlying technology of Blockchains arose from other things, the supposed need to get rid of any counter parties (brokers, banks and even governments) in matters of finance. It seems like a very American thing to do - Make the world truly free market without any interference to the individual from any third party in the guise of making markets / increasing efficiency.

This is an open secret. And any government would be deeply uneasy about the possibility of a parallel economy where its control is minimal. The RBI has in my opinion identified this threat. And hence we see all these quotes by various top officials about how cryptocurrencies are dangerous to the formal economy and how they could cause the next financial crisis.

However, this reaction may be a little heavy handed or even pre mature. Blockchain as a technology is still in a relatively nascent stage and most developments in this space still being supported by elements of the Formal Economy (VCs, some Pension Funds and even small individual investors). This is important to note since a parallel rebel economy can hardly be built with so much support from the very entities that are touted to be replaced. The current volatile interest rate scenario post covid has further shown how deeply Crypto is dependent on the formal economy. With cheap funds no longer easily available, a large number of crypto projects have gone bust.

What about safeguarding Investor Interest?

This seems to be a favourite excuse by SEBI and the RBI when it comes to curtailing cryptocurrency speculation. There is no doubt that cryptocurrencies and blockchain based "investments" are highly risky and speculative. Right off the bat, I would state that Indian Regulators are indeed some of the most forward thinking in terms of investor protection. Whether it be in terms of easing up operations in equities market, deepening of the bonds market and even introducing new products like InvITs and REITs. But let us not kid ourselves that the general market has no other risky avenues to bet money on other than Cryptocurrencies. All one has to do is search for the various shady Seminars on Options, Futures and Stock Trading to see that people are pouring in thousands of Crores of Rupees into various risky ventures with as little research as possible.

But we haven’t seen the same heavy handed approach to "protect" these investors whereas crypto investors were pummelled into submission with a 1% trading tax as well as a 30% tax on gains (among other arbitrary rules to supposedly protect us). People would have lost more money from the chaos in the market ensuing from these protectionist measures as compared to the usual volatility related issues. Furthermore, most of Indian Crypto speculators were on exchanges where even a fart can be recorded. The real "shadiness" that people associate with crypto happens on the direct blockchain which most people in India would have no idea on how to access. I speak with some authority here as someone who has lost money in almost every possible way on the blockchain barring an actual hack of my Metamask wallet (those of you who had to Google to see what Metamask is only support my claim that the Indian scene in crypto was almost purely trading rather than being based on some lofty ideals of a "bankless" world).

Yes, the Crypto exchanges all over the world did go overboard with the ads on "guaranteed returns" etc. but the subsequent action to protect investors has lead to a classic case of "Operation was successful but the patient died".

Cryptocurrency Trading is not the end use case of Blockchain technology

Today, the lay person in India and much of the world thinks of blockchain technology only from a trading perspective or as a source of illegal activities and money laundering. They ignore or rather are unaware of the large number of projects and companies attempting to use blockchain technology to solve real world problems. The RBI's concept note does delve into this aspect when they consider programmable money etc. Similarly, many projects including those with an underlying cryptocurrency are trying to scale up activities like online gaming, financial contracts, community participation etc.

The much ridiculed NFTs are being considered for the real world purpose of maintaining land records and other areas where the question of ownership of assets may arise. Furthermore, aspects like payments are also being looked at.

A one size fit all solution will not be useful while dealing with Blockchain technology.

Yes, we need to ensure that key aspects of national security and financial inclusion are not compromised. But burning the entire forest to get rid of a few wild animals is not the optimal solution.

With the budget session of the Indian Parliament approaching(update: The FY24 budget did not see any mention of Cryptocurrencies, so as of now we appear to be safe from regulatory over enthusiasm), we are beginning to see more statements by various officials denouncing cryptocurrencies (and blockchain by association). The last session paved the way for the disastrous taxation system for Cryptocurrency trading. I hope this time, we see a more nuanced approach to ensuring safe adoption of blockchain technology and its associated applications. However, something tells me that Im going to be disappointed again on this aspect.