Indian business leaders and many firms rarely speak out against government policy or regulatory authorities. The US-based Coinbase, which is listed on Nasdaq, however, appears to have taken on the risk.
Its CEO and co-founder, Brian Armstrong, has gone public to say that his firm, which launched its digital trading services in early April, was within days forced to disable its Unified Payments Interface, or UPI, under “informal pressure from the Reserve Bank of India” (RBI). The Indian central bank, he has said on record, forced the company, pressing it from behind the scenes, to disable some of the payments which may be going through the UPI. And not is just the RBI but “elements in the government” too were putting a spoke in the wheels of crypto exchanges, says Armstrong, although the Supreme Court had shot down in 2020 a ban placed by the RBI on banks supporting cryptocurrencies.
The RBI and the government have not denied the charges so far.
It is not that regulators in many other jurisdictions always take such stuff on the chin. But if Armstrong’s charge is true, then what is unsettling is the Indian banking and payments and settlements regulator’s growing recourse to behind-the-scenes moves for signalling its intent. Plus, this episode also raises valid concerns about the framework of regulation. The regulatory framework and the law on digital assets remain a work in progress. India has offered no clarity on what the government’s position on cryptocurrencies and stable coins is or will be. Confusion and speculation rule, as a consequence.
True, the growth in digital assets such as cryptocurrencies and stable coins has posed severe challenges not just here but globally too. And regulators even in advanced economies are grappling with these issues. But the sequence of events in India has taken a strange turn.
First, while the preparation of a draft for the law on cryptocurrencies is still in the works, the government has gone ahead to impose a 30% tax on private cryptocurrencies and a one percent TDS on every digital asset transaction. This was done in the budget presented on 1 February.
Then, days later, RBI Governor Shaktikanta Das issued a warning to investors, making the Indian central bank’s discomfort plain in this emerging investment segment, saying that it was his duty to tell investors that when they invest in cryptocurrencies, it was at their own risk. “They should keep in mind that these cryptocurrencies have no underlying asset. Not even a tulip”, he told a press conference in February.
And now, a Nasdaq-listed company has charged the RBI with slapping it with a shadow ban and behind-the-scenes arm-twisting in order to restrain its operations, despite there being no law yet that restricts, allows, or regulates its activities.
Should regulators in a mature economy indulge in such practices? If Das could issue a warning to investors, and he was absolutely right to do so, then surely the RBI could have just as transparently, through a public statement, reminded Coinbase and others like it of the risks to their business from the prevailing regulatory vacuum that will last until the time the government’s legislation is ready and cleared by Parliament. The RBI could have openly and publicly encouraged Coinbase to be mindful of its discomfort. That would have been a far more credible way of restraining Coinbase. Remember, the issue here is not what the RBI wants, but how it has gone about accomplishing it.
There is far more concern now globally, especially after the war in Ukraine, about the need to introduce uniform rules and regulations on cryptocurrencies or digital assets. The US Presidential order in March this year flags off many concerns that the country has on this front. The Presidential order which mandates the Secretary of the Treasury to submit a report in 180 days says that digital asset issuers, exchanges and trading platforms, and intermediaries whose activities may increase risks to financial stability, should, as appropriate, be subject to and in compliance with regulatory and supervisory standards that govern traditional market infrastructures and financial firms, in line with the general principle of the same business, same risks, same rules.
The Chair of the US Federal Reserve, Jerome Powell too said at a BIS meeting in March that many Americans who buy stable coins and cryptocurrencies may not fully comprehend the extent of their potential losses or the fact that such investments do not offer protection from the government which is available to many of the traditional financial investments and services. The Bank of England, the Bank of Japan and others too agree on the dire need for enhanced regulatory and enforcement frameworks.
This cannot be stressed enough.
The cornerstone of good regulations and policymaking which are key to reforms and growth are predictability, transparency and a participatory approach involving all stakeholders. The RBI too should pass the smell test on this. There is a strong case for the Indian central bank to shed the behind-the-scenes approach and be more open, upfront and reasoned in its regulatory actions. That would only enhance its credibility and lead to better economic outcomes besides reflecting a confident central bank at work like its global peers.