RBI deputy governor says crypto akin to ponzi schemes, even worse; says, ban ‘most advisable’

Comparing cryptocurrencies to a ponzi scheme, the Reserve Bank of India Deputy Governor T Rabi Sankar said it is “most-advisable” for India to ban crypto assets. Crypto has no intrinsic value and in fact, functions like a gambling contract, Rabi Sankar said at an event on Monday. He also dissed various definitions of crypto devised by its proponents, and said crypto is not a currency, asset or a commodity.

“As a store of value, cryptocurrencies like bitcoin have given impressive returns so far, but so did tulips in 17th century Netherlands. Cryptocurrencies are very much like a speculative or gambling contract working like a Ponzi scheme. In fact, it has been argued that the original scheme devised by Charles Ponzi in 1920 is better than cryptocurrencies from a social perspective . Even Ponzi schemes invest in income earning assets,” Rabi Sankar said.

The deputy governor’s comments come days after the RBI Governor Shaktikanta Das warned crypto investors to be wary of it and said that investing in crypto is even worse than Tulipmania, as it does not even have an underlying value.Tulipmania of the 17th century is one of the most infamous bubbles. At that time, prices of tulip bulbs soared higher than the annual income of skilled workers.

Deputy Governor Rabi Sankar, who was appointed to the position in May last year, said investing in crypto is like investing in a zero-coupon perpetual, and the investor in such a scheme will neither get an interest nor principal amount. “A bond with similar cash flows would be valued at zero, which, in fact, can be argued as the fundamental value of a cryptocurrency,” he added.

Dollarisation of Indian economy

If India allows a private currency like cryptocurrency in the country it could lead to Dollarisation of the Indian economy and the central bank will lose the ability to control policy, Rabi Sankar said. Adopting a private currency will be a retrograde step that will impact the social, economic and legal fabric of society, he said. This can eventually result in private currency replacing the Indian rupee to some extent, and Indian rupee being undermined, the deputy governor said. In such a circumstance, there would be a parallel currency system (or systems) in the country. Thus, increased acceptance of cryptocurrencies would result in effective ‘Dollarization’ of our economy, he added.

“Dollarization, it is well understood, would undermine the ability of authorities to control money supply or interest rates, as monetary policy would not have any impact on the non-Rupee currencies or payment instruments. When that happens, India loses not just its currency, a defining feature of its sovereignty, but its policy control of the economy,” T Rabi Sankar  said in the speech.

Cryptocurrencies attractive for illegal activities

The deputy governor said cryptocurrencies came into existence in 2008 as a technological solution due to distrust in the banking system. It has since been hailed as an innovation that would usher in decentralised finance or DeFi, a social movement to democratize the financial system.

But contrary to expectations, reports indicate that 13% of all Bitcoin sits in the hands of just over 100 individual accounts. Those bitcoin holders are referred to as  “crypto whales”. Moreover, cryptocurrencies, since they bypass the financial system and its checks, have been particularly  attractive to illegal or illegitimate transactions. It bypasses rules such as such as Know-Your-Customer regimes, Anti-Money Laundering and Combating the Financing of Terrorism rules. 

Citing a WSJ report from January, Rabi Sankar said that crimes using cryptocurrencies in 2021 was estimated to be $14 billion. He said if a ban is imposed, the majority of law-abiding citizens will desist from investing in crypto even though some will continue to invest. 

“One might as well argue that drug trafficking is a rampant phenomenon despite a ban, and therefore drug trafficking should be legalised and regulated. If cryptocurrencies are banned, the vast majority of investors who are law abiding would desist from investing. Those few elements who would continue to invest will essentially be carrying out an illegal activity. Such exceptions should reinforce the need for a ban, rather than invalidate it,” he said.