‘Crypto assets have no underlying value’

(This story originally appeared in on Feb 04, 2022)

Economic affairs secretary Ajay Seth, who is working on the crypto currency policy, has cautioned investors on virtual digital currency, saying there is no underlying value and the exchanges dealing in them are not regulated.

“The Finance Bill has sought to provide clarity on taxation but that does not mean that all policy options are off the table. Everything is on the table – whether ban, regulation, etc, but that’s a separate aspect, which is taking time because of the complexity and the nature of the asset,” he told TOI in an interview.

What is the plan on sovereign green bonds?

It will be part of overall borrowings and will be raised from the domestic market. Our sense is that there is a class of investors, who have a desire and appetite to put in money for greener usage but perhaps would be looking to settle for somewhat lower than market yield. Some pension funds or others have mandates to invest in certain sectors. The challenge for us is to put a credible framework on the sectors and projects so that money is used only for green projects and helps the economy move towards a less-carbon path. Hitherto government borrowings can be used for anything, but we are going with a purpose-specific bond. I don’t expect it to be a significant proportion of the overall borrowing, but it will be a substantial number.

What is the legal status of crypto assets?

FM has clarified that taxation has nothing to do with government policy on crypto assets. The Finance Bill has sought to provide clarity on taxation but that does not mean that all policy options are off the table. Everything is on the table – whether ban, regulation, etc, but that’s a separate aspect, which is taking time because of the complexity and the nature of the asset. These instruments are created in the digital world and are traded in the digital world and they are not designed for following jurisdictions of the country. That requires international co-operation and some broad understanding on where countries want it to go. We are engaged in consultation with institutional stakeholders, which have the mandate for macro-economic stability.

In the absence of a regulatory framework, what is the mechanism for protecting investors?

Investors should be aware of the risks and suitable guidance is being provided. The RBI governor and Sebi chairman have spoken, and the finance ministry through press releases is cautioning people that these are pure speculative assets. They are doing it at their own risk. They are getting into assets which have no underlying value. Prices of shares also go up and down but behind that are earnings of a company. In case of crypto, there are no earnings, only pure speculation. The concerns around digital assets getting into the economy generate its own sets of risks, which are genuine and need to be addressed. India’s financial markets, in terms of regulation or use of technology, are among best in the world. Exchanges, depositories and settlement are three separate functions and are regulated by Sebi. But, in case of crypto exchanges everything is combined into one. We don’t know their ownership or governance, while in case of exchanges such as BSE or NSE, rules are in place. If you put too many regulations they will just move, or if you ban, things may shift. These are being discussed.

Is there some under-budgeting for possible inflows on small savings?

This year, we expect around Rs 6 lakh crore of inflows. But in a typical year it is of the order of Rs 3-4 lakh crore and in 2022-23, we expect around Rs 4.25 lakh crore of inflows on a perspective that people will find other investment avenues to be equally attractive. But if it does not happen, then market borrowings will go down.

Are projections on growth & inflation conservative?

In 2022-23, retail inflation will be within policy band, keeping all factors, including commodity prices and global tightening of rupee. WPI should moderate because of base effect and commodity prices should come down due to monetary tightening.

Apart from forex reserves, how ready are you to deal with global tightening of liquidity?

That is a risk, but it is not a significant risk because the Indian economy is in a very strong position to withstand that. We are in a position which we have never had in the past. We have high forex reserves plus exports are doing well.