The cryptosphere needs amplified risk warnings

News: RBI officials have done well to caution crypto enthusiasts by talking about tulip mania and Ponzi schemes. While the case for a digital-token ban remains weak, risk awareness must rise.

Offer documents of public offerings give an insight into the associated risk factors to potential investors. But there is no such equivalent in Cryptocurrency. Hence, in this context, the voices of our central bank’s top officials need to be amplified.

Tulip Mania: It occurred in Holland during the early to mid-1600s when speculation drove the value of tulip bulbs to extremes. At the height of the market, the rarest tulip bulbs traded for as much as six times the average person’s annual salary. The term is often used to refer to a financial bubble.

Ponzi scheme: This refers to a financial pyramid that uses funds of an expanding base of new ‘investors’ to assure a smaller group of earlier sign-ups big returns. It is a fraud that usually gets exposed once it runs out of gullible folks to lure. Cash inflows fall short of promised payments, and the whole thing collapses.

Is Cryptocurrency a threat to monetary policy?

If digital coinages widely replace rupees as tokens of exchange, it would blunt our tools of monetary policy. This can endanger the management of our economy, but this worry seems overblown right now because the cryptosphere is too crowded for any single ‘stablecoin’ to emerge as a winner.

Is a ban on Cryptocurrency imminent?

With top RBI officials coming out with strong views against Cryptocurrency and with Finance Minister stating that taxing Crypto is not equivalent to legalising it, a ban is a possibility.

Moreover, a ban on Crypto will not hamper the Blockchain led innovation in any manner.

What is the way forward?

Threat to the monetary policy can be taken care of if RBI keeps inflation under control and by deploying its own Central Bank Digital Currency (CBDC).

Further, a crypto ban would be hard to enforce, given the secrecy with which password ‘keys’ can be held.

Also, there’s no sense in forgoing a source of tax revenue.

To make the public aware of risks associated with investing in Crypto assets, public-warnings need to get even louder. Suitably alerted to risk factors, people should be left at liberty to buy the tokens they want.

Source: This post is based on the article “The cryptosphere needs amplified risk warnings” published in Live mint on 16th Feb 22.

Print Friendly and PDF