Cryptos yet to pass test of fiat money, says Chief Economic Adviser V Anantha Nageswaran

Chief economic adviser (CEA) V Anantha Nageswaran on Thursday stressed that cryptocurrencies are yet to pass the desired rigorous tests to be on a par with fiat money and that they are a case of “regulatory arbitrage”, rather than financial innovation. Speaking at an Assocham event, the CEA said cryptos can’t match the basic tenets of the fiat currency — the latter has a store of value and widespread acceptability, and is a unit of account. The CEA’s remarks, and the recent comments of senior finance ministry functionaries, are being seen as precursor to the government toughening its stance, as it gives finishing touches to a consultation paper on cryptos.

Commenting on decentralised finance (DeFI), Nageswaran said: “In my opinion, while it is considered innovation, I would reserve my judgement whether it is truly innovative or truly disruptive in a positive sense, or is it something that we will come to regret. ” “Much of what is happening in the space of cryptos or decentralised finance — and I completely endorse what T Rabi Sankar, Reserve Bank of India (RBI) deputy governor, has been saying — as of now they do appear to be a case of regulatory arbitrage rather than a case of true financial innovation in my opinion,” the CEA said. Given these reasons, the CEA said he might not be very excited by the cryptos “because sometimes we may not be fully aware or comprehend the kind of forces we are unleashing ourselves”.

“So, I would be somewhat guarded in my welcome of some of these FinTech-based disruptions like DeFI, crypto, etc,” Nageswaran said. Last week, economic affairs secretary Ajay Seth said India will soon finalise the consultation paper on cryptos with inputs from various stakeholders and even multilateral institutions such as the World Bank and the International Monetary Fund (IMF). Underscoring the need to firm up a global strategy, the secretary said “countries that have banned these digital assets can’t succeed” unless there is a global consensus on their regulation, as these work in the virtual world.

The government had intended to introduce the Cryptocurrency & Regulation of Official Digital Currency Bill in the winter session of Parliament last year, but later decided against the plan. The Bill had sought to “prohibit all private cryptocurrencies”, although it was to allow certain exceptions to promote the underlying technology of cryptocurrency and its uses. Subsequently, following the Budget’s announcement to tax profits made from transactions of virtual digital assets at 30%, some analysts had claimed that the move legalised cryptos.

To scotch such speculations, finance minister Nirmala Sitharaman had to stress repeatedly that it was the government’s “sovereign right to tax” such transactions and the Budget move had neither legalised cryptos nor prohibited them. “I am not going to legalise it or ban it at this stage. (A decision on) Banning or not banning will come subsequently, after consultations,” she had told the Rajya Sabha in February.

Subsequently, the government held consultations and is ready to release a paper soon. For its part, the RBI has favoured a ban on private cryptos, saying they threaten the financial sovereignty of a country. The finance ministry is expected to soon define virtual digital assets, including non-fungible tokens (NFTs), for the purpose of taxation.

Some analysts have already highlighted the need to differentiate between NFTs that digitally represent real or virtual assets from cryptocurrencies that lack any underlying asset. Taxing NFTs at 30% on a par with cryptocurrencies could kill the nascent industry, they said. .