A top official of India’s central bank has compared cryptocurrency to a “Ponzi scheme” and suggested an outright ban in its sharpest criticism just weeks after the government proposed taxation of the virtual digital asset and paved way to recognize it as legal tender in the world’s second-largest internet market.
T. Rabi Sankar, deputy governor of Reserve Bank of India (RBI), told an audience at a banking conference that cryptocurrencies have been “specifically developed to bypass the regulated financial system,” and are not backed by any underlying cash flow.
“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,” he said.
Sankar’s remarks come at a time the Indian government has sent signals that it’s moving in the direction of recognizing the digital virtual asset as legal tender. The nation’s Finance Minister Nirmala Sitharaman proposed taxing income accrued from transfer of cryptocurrencies and NFTs in the federal budget early this month.
The sale of cryptocurrencies and NFTs have made quick inroads in India in the past year despite regulatory uncertainty. The world’s second-largest internet market has seen the second-highest adoption rate for cryptocurrency investments, according to an analysis by research firm Chainalysis.
“The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime,” she said in her budget speech.
India’s central bank has so far been very cautious about cryptocurrencies. In 2018, it banned financial firms from dealing with cryptocurrency. The ban was overturned by India’s Supreme Court two years later, but most banks have continued to follow the RBI’s direction.
Sitharaman said on Monday that New Delhi and the RBI were holding discussions to formulate rules and that the two were “onboard.”
Sankar’s speech has made it clear that the RBI has not changed its long-held stance. “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,” he said.
Cryptocurrencies can “wreck” the currency system, the monetary authority, the banking system and in general the government’s ability to control the economy, he warned.
“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. All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India,” he said. “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.”