Cryptocurrencies Akin To Ponzi Schemes, Need To Be Banned: RBI Dy Governor

Reserve Bank of India (RBI) Deputy Governor T Rabi Sankar made a strong argument for banning cryptocurrencies on Monday, saying they are far worse than Ponzi schemes and endanger a country’s financial sovereignty. He noted that crypto-technology is based on a mindset of avoiding government regulations and that it was created precisely to escape the regulated banking system.

He went on to say that cryptocurrencies have the potential to destabilise the currency system, monetary authority, banking system, and the government’s capacity to oversee the economy in general. Sankar remarked during a keynote talk at the Indian Banks Association’s 17th Annual Banking Technology Conference and Awards, “All of these facts led to the conclusion that banning cryptocurrencies is possibly the most advised decision accessible to India.”

“We have also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they are akin to Ponzi schemes, and may even be worse. These should be reason enough to keep them away from the formal financial system,” he noted.

Additionally, they undermine financial integrity, especially the KYC regime and AML/CFT (anti-money laundering/combating the financing of terrorism) regulations and at least potentially facilitate anti-social activities, Sankar said.

“They threaten the financial sovereignty of a country and make it susceptible to strategic manipulation by private corporates creating these currencies or governments that control them…We have examined the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny,” he said. The senior RBI official further said global advertisements with themes such as ‘fortune favours the brave’ is reflected somewhat in our very own ‘lag ja re…kuch to badlega’.

He also criticised numerous definitions of cryptocurrency established by its supporters, claiming that cryptocurrency is not a currency, asset, or 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.

His remarks came just days after RBI Governor Shaktikanta Das cautioned crypto investors to be cautious, saying that investment in crypto is worse than Tulipmania since it lacks underlying value. One of the most well-known bubbles is the 17th-century tulipmania. Tulip bulb prices increased during the period, exceeding the annual pay of qualified workers.

Sankar, who was appointed to the role in May of last year, stated that investing in cryptocurrency is similar to investing in a zero-coupon perpetual, in which the investor receives neither interest nor principal. A bond with comparable cash flows would be valued at zero, which is, in fact, the underlying value of a cryptocurrency.

According to Rabi Sankar, if India accepts a private currency such as cryptocurrencies in the country, it might lead to the Dollarisation of the Indian economy and the central bank’s capacity to oversee policies. Adopting a private currency will be a backward step that will have an influence on society’s social, economic, and legal fabric, he claims. According to the deputy governor, this could eventually lead to private money partially replacing the Indian rupee and undermining the Indian rupee. In such a case, the country would have a parallel monetary system (or systems). As a result of greater acceptance of cryptocurrencies, our economy would be effectively ‘Dollarized,’ 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.

According to the deputy governor, cryptocurrencies were created in 2008 as a technological remedy to the banking system’s distrust. It has subsequently been praised as an innovation that will usher in decentralised finance, often known as DeFi, a social movement aimed at democratising the financial sector. However, contrary to popular belief, statistics indicate that 13 percent of total Bitcoin is held by just over 100 individual accounts. These bitcoin owners are known as “crypto whales.” Furthermore, because cryptocurrencies skip the banking system and its safeguards, they have proved particularly appealing to unlawful or fraudulent transactions. It circumvents requirements such as Know-Your-Customer, Anti-Money Laundering, and Combating the Financing of Terrorism.

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