In a recent speech given on March 2, 2022, RBI deputy governor, T Rabi Sankar, elaborated on the concept of cryptocurrencies, their nature, and arguments for and against a ban in India.

Excerpts from the speech published on the RBI website.

Why were cryptocurrencies created?

“Some people felt that intermediation by banks is avoidable. Either they felt that banks are not trustworthy, or they considered that the cost charged by banks is excessive, or they were not comfortable with their transactions being tracked. Guided by the idea that cash remains one of the best ways to exercise free speech (refer footnote 3), their solution was to create their own private currency and a transaction arrangement or network that bypassed banks or any other financial or social institution.”

Untraceable, anonymous, borderless

a.) That cryptocurrencies are decentralized systems where transactions are authenticated by participants themselves by consensus. They are designed to bypass the financial system and all its controls. They cannot be traced or confiscated or frozen by Governments.

b.) They are anonymous – transactions are verified, but not the purposes or counterparties of transactions.

c.) They are borderless – that is, they work over the internet without any physical existence.

All that glitters is not gold. Cryptocurrencies have zero fundamental value

“If cryptocurrencies are neither a currency in the usual sense of the term, nor a financial asset nor a physical asset, [then] what are they?”

“A bitcoin is… like you paid money to buy a bond which pays no interest and which will never pay back the principal. A bond with similar cash flows would be valued at zero, which, in fact, can be argued as the fundamental value of a cryptocurrency.

“Cryptocurrencies are very much like a speculative or gambling contract working like a Ponzi scheme.”

“It is an electronic code (with no practical use) which has created enough hype such that people are willing to pay money to buy ownership rights to that electronic code, seemingly on the hope that someone else would buy it at a higher price in future. What started off as a medium of exchange has appeal similar to that of a speculative asset.”

Social and economic role

“While there is anecdotal evidence of businesses using bitcoins, there really is no reliable data available; by all indications their use as a currency appears to be negligible.”

“For all the hype about a revolutionary innovation, cryptocurrencies themselves do not appear to be designed to meet any need in the finance space that is currently not being met or to meet existing needs more efficiently.”

The big risks

“The fundamental risks of cryptocurrencies are two – they are intended to be private currencies and they are structured to evade Government control with respect to financial integrity standards such as KYC, AML/CFT etc.”

Can Stable Coins like USDT address these concerns?

“We should in fact be more concerned about stablecoins because they would be more effective as currency than volatile cryptocurrencies. As the FT video cited above says, “Stablecoins pegged to official currencies would increase, rather than dampen risks, if assets and liabilities were mismatched.””

“From what we have seen so far, there does not appear to be any case to allow cryptocurrencies to be legitimized in India.”

Read the full speech here: https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20870