Crypto tokens as an investment or masquerading as a currency and crypto exchanges facilitating this investment are not technology -- they are merely products based on blockchain. (Representational Photo)

Crypto tokens as an investment or masquerading as a currency and crypto exchanges facilitating this investment are not technology — they are merely products based on blockchain. (Representational Photo)

Investment in crypto products does not benefit the fintech but it does create a parallel unregulated pool of investments, which the RBI governor said can destablise the macroeconomic environment.

  • Last Updated:November 22, 2021, 12:24 IST

When it comes to preventing scrutiny, the trick of the trade is to seek regulations. This counterintuitive strategy is being adopted by lobbyists of crypto tokens in the country who are coming under increasing pressure from the government, the Reserve Bank of India and the Ministry of Finance. Industry bodies that support this strategy need to be careful as such a compromise can only harm the fintech ecosystem and the larger economy. The government has to look beyond this bogey of regulations and ban the crypto assets and companies selling it.

Several industry bodies such as Nasscom, IAMAI and IndiaTech along with crypto-exchanges in the country are asking that crypto products should not be banned but regulated. Their long-standing “rationale” has not changed: that if India bans crypto it will fall behind the technology curve and the country will lose out on the innovation cycle. This is a bogey that needs to be demolished. First of all, crypto tokens as an investment or masquerading as a currency and crypto exchanges facilitating this investment are not technology — they are merely products based on a common concept, blockchain — even if they using different hashing technologies for encryption. The technology or the algorithms that are used for encryption are already being used by various entities. For instance, Bitcoin uses the SHA 56 algorithm while Ethereum uses Keccak 256 – these are the largest two crypto tokens. I am consciously not using the word “currency” as I have said in my earlier write-ups that they are not currencies.

There is another technology akin to the public key encryption that is used by e-commerce or payment systems across the banking world. India has not regulated the technology as it is not feasible while the US does regulate some encryption technologies that it thinks are of national strategic importance and monitors its exports to what it claims to be “rogue” states. The lobbyists want to confuse the government and even the Standing Committee on Finance with fancy talks about technology and its impact. National interest is trotted out and the progress of the whole startup ecosystem including fintech is seen as depending upon investment in crypto products. Investment in crypto products does not benefit the fintech only the crypto exchanges benefit as they charge a fee for the investment. The harm is much more long standing, retail investors will lose their capital. Plus it creates a parallel unregulated pool of investments that can be used for unauthorised transactions and exchange. The RBI governor even pointed out that it can destablise the macroeconomic environment if these assets keep masquerading as currency.

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Digital investment products, which are developed using crypto technologies have to be approved by a regulatory body — the Securities and Exchange Board of India (SEBI), or the Insurance Regulatory and Development Authority of India (IRDAI), or some other. They have to pass the basic rules of surety, counterparty guarantee and disclosure of risks before anything else. Most of them will not pass the counterparty guarantee rule as they do not have inherent values, plus the companies selling them do not collect funds or assets to guarantee. An exchange not guranteeing transactions and an asset without inherent value will not be able to pass any regulatory test.

Digital products cannot hide behind technology and free their makers from all regulatory oversight. There is nothing to be gained from investing in these crypto tokens when their inherent value is zero like a Kardashian investment. For too long, crypto exchanges have broken every caveat of investment advisors by advertising enormous gains. They have misused media through paid programmes and other means to promote their nefarious products. The regulators have allowed it to happen despite Prime Minister Narendra Modi cautioning investors and even countries about investing in crypto products.

The lure of lucre is so high that news channels have anchors with laptops emblazoned with the logo of these crypto exchanges. Even the business new channels have been compromised as they report on values of these tokens as if they were reporting on stock values. There are sponsored shows on news channels. Pink newspapers have deals to write on them every week at least 3-4 times, promoting their investment values.

Many of crypto exchanges are backed by local venture capital firms; some of them by global firms. If they are to be regulated, they have to be registered as an exchange with SEBI. The investment tokens that are being offered on their exchanges need to be legal, with counter party assurance and funds to ensure that transactions are fulfilled to ensure for them to be an exchange. As an exchange they cannot advertise the investment opportunity without disclosing the risk. How many times have we seen the National Stock Exchange advertising investment in individual stocks or the returns that investors have made from them?

Celebrities like Amitabh Bachchan and Ranveer Singh are seen endorsing investment in these tokens as an alternative to gold. Film celebrities are not expected to know much about the brands they endorse but they do make the brand stand out from the clutter. Though they have relatively low reliability when it comes to financial products.

Whatever be the reason, the exchanges have started claiming that many crore investors have invested in them, and they are using it as a threat for not banning them. There is a little credibility behind these investor numbers as they have not been audited by a third party. Secondly, most of the studies that quote these numbers are sponsored by these exchanges. Third, if so many investors have been exposed to these risky assets there is more reason to bar and prevent further foul play.

It is astonishing the mesh of lies that these crypto organisations have created. At the height of collective investment schemes, they also had crores of investors but they were barred from collecting any further investment. I think, these crypto-exchanges need to be reminded of examples like Sahara which also had crores of money and investors. They are, at the end of the day, multi-level marketing or collective investment schemes and they have to be barred, immediately.

The trick of asking for regulations and then lobbying against it by deflecting and confusing policy makers is an old practice. A number of lobbyists will be hired; media influencers will be hired by PR agencies representing these Crypto exchanges. I can even predict the line they will take on regulations. First, we need ‘proper’ global regulations as this is a global play and not a local play. Second, we need a global consensus on these regulations. Now, we all know how long a global consensus takes to develop and agree upon. Meanwhile, they will keep selling these tokens and fooling the gullible investors into making investments. Third, the old fear that they will raise- should not bar them until there are global regulations as it will harm the fintechs, startups, investment climate and even the Indian economy. Association, lobbying bodies, paid lawyers and influencers will muddy the waters every day with arguments obfuscating the issue.

The only way to prevent the country from being taken for a ride is to bar these tokens from being sold in the country as a currency or as an investment asset. Crypto-exchanges need to be registered with SEBI and meet all the regulatory requirements of an exchange. Central Bank Digital Currencies (CBDCs) regulations have to be issued defining them and approving them as the only asset, currency or option on the digital platforms for use as currency or exchange.

The author is a senior journalist and associated with a think tank based out of Gurgaon. The views expressed in this article are those of the author and do not represent the stand of this publication.

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