India should ban ‘Ponzi’ private cryptos or risk wrecking the country’s financial system, a top RBI central banker has warned

• The best option for India is to ban private cryptocurrencies, one of the country’s top central bankers said Monday.
• Private crypto is worse than Ponzi schemes and pose a threat to financial stability, Rabi Sankar said.
• India has taken a tough stance on crypto as it develops its “digital rupee” CBDC, expected by March next year.

India’s best choice is to ban private cryptocurrencies because of the risks they pose to the country’s financial systems and sovereignty, a top central banker has warned.

Rabi Sankar, deputy governor of the Reserve Bank of India, took aim at private crypto in a speech at a local banking conference on Monday, underlining Indian authorities’ tough stance. 

He said cryptocurrencies can’t really be defined as a currency, asset, or commodity, given that they don’t have any underlying cash flow or intrinsic value, and that they are like a “Ponzi” scheme or even worse. 

For these reasons alone, private cryptocurrencies should be kept away from the formal financial system, he said.

“More substantially, they can (and if allowed most likely will) wreck the currency system, the monetary authority, the banking system, and in general government’s ability to control the economy,” Sankar said. 

This adds up to a threat to a country’s financial sovereignty, he warned. It becomes vulnerable to manipulation by the private companies that create digital currencies or the governments that control them, according to Sankar.

“All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India,” he told the conference.

Sankar’s tough words highlight Indian authorities’ efforts to keep a grip on digital currencies in a country with an estimated 15 to 20 million crypto investors. India is second only to Vietnam in crypto adoption, according to the 2021 Global Crypto Market Adoption Index from Chainalysis.

The government plans to impose a 30% tax on income from cryptocurrencies and other digital assets such as NFTs, or non-fungible tokens. It also wants to deduct 1% in tax at source on payments related to buying such assets.

While many saw this as a move towards legitimizing crypto, some were worried the high tax might discourage crypto trading. 

At the same time, India plans to roll out its own digital currency, nicknamed the “digital rupee,” suggesting it is the private nature of private cryptocurrencies that is worrying authorities.

India plans to introduce its central bank digital currency, or CBDC, before March 2023. Major central banks such as the US Federal Reserve and the Bank of England are already developing CBDCs, which provide a centralized, official alternative to pure cryptocurrencies. 

But it is the Chinese central bank that is leading the way in CBDCs, and is it several years ahead of its counterparts in its development program. Its digital yuan is in use at the Beijing Winter Olympics on right now.

Lawmakers in India’s lower house in December introduced a bill to prohibit all private cryptocurrencies, but the government later said it could instead bring in regulation.

But Sankar said none of the arguments for crypto regulation stand up to basic scrutiny.  

“We have seen that crypto-technology is underpinned by a philosophy to evade government controls. Cryptocurrencies have specifically been developed to bypass the regulated financial system. These should be reason enough to treat them with caution.”