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In Favour of RBI: Is the central Bank Justified for Banking Ban?

Four days ago a journalist who goes by @cryptomedicated on twitter posted an article on their medium blog @thedailydose. The article is titled ‘Why the India ‘Bank Ban’ Should Be Expected and Why ANY Strong Reaction Would Be Illogical’. Cryptomedicated isn’t from India, as the post suggests.

In this article, I am trying to throw light into what cryptomed has shared and share arguments from an Indian context as well.

Why RBI Banking Ban is Justified?

India Has Never Been a Major Source of Volume

Cryptomedicated starts by saying that India was never a source of major volume for cryptocurrency trading. His source is the data from LocalBitcoins, a peer to peer exchange.

At the height of trade in the last year, the estimated OTC volume (data from localbitcoins) from India stood at about $3.8M USD daily, which is nothing substantial when considering the $70B+ of traded volume in crypto at that moment in time.

And hence he continues, “I’m not sure if the news will really make that much of an impact in terms of the immediate impact on crypto”

Fact of Fiction?

Partially a fact. The localbitcoins volume is only $3.8M USD maximum in a day, but we have to account for the volume from other exchanges and other cryptocurrencies as well. For instance, on December 13, on Koinex, the 24 hour volume for XRP was 23.4 Million and XRP prices hadn’t even reached a Dollar yet. At 0.75 USD, the volume of XRP traded on Koinex on December 13 was $17.55M. That’s just one exchange and one asset.

Zebpay was pulling BTC trade volumes in over 300 BTC a day, that is another 5.7M USD from BTC as well. Most Indians got into cryptocurrency via the exchange route rather than the OTC route. It was the combined efforts of referral systems and collective worldwide spread of the Bitcoin Mania.

And this is after Finance Minister Arun Jaitely’s announcement that the government doesn’t recognise crypto as a legal tender.

Our country wasn’t pulling 70B USD volumes, but it was quite a lot more than what LocalBitcoins saw or reported.

Secondly, the news have a big impact on the crypto enthusiasts. Multi Million Dollar crypto exchanges had to run to the supreme court to ask for a stay the RBI’s decision, didn’t get the stay. Zebpay downsized. Crypto traders lost value in cryptocurrency as prices in India came straight down from a 10% premium over international prices to 5-10% discount.

Most importantly, the decree immediately started sending our country’s blockchain based startups outside. While many have been reported, a bunch of them silently started applying to other countries. One notice single handedly curbed the growth of a budding industry.

Economy of India is Unstable

Cryptomedicated shares an article that talks about India’s economic stability in October 2016. The article talks about the then current problems with the banking sector and what is the new model to cope with it.

India’s infrastructure is in some serious disarray and so is their financial system. There was a period of time where banks in India were unable to borrow money from their federal reserve system in order to grant loans to other individuals in the country

Fact of Fiction?

Partial fact. The economic stability of India is in stress all the time, so is every other country’s. There is always a looming threat of a take-over from an emerging market. The job of the people sitting up there serving the country is to take steps to keep the economy stable.

But, India’s economic stability cannot be determined by one article from 2016. Here’s why? Recently India has been in news for a strikingly different reason. India has the fastest growing economy and is steadily growing to overtake China. This was reaffirmed by International Monetary fund (IMF) in January, 2018 – long before the banking ban was announced.

Back at home, In December, 2017 RBI reported Indian Financial system “remains stable” but in the June 2018 edition of Financial Stability report, RBI stressed on a number of risks and measures taken to mitigate them. So the government has to worry about economic stability as financial instability can lead to macroeconomic stability failure.

Hence it is not truly determinable whether the country is economically stable based on old articles.

Why is Government Leaning Against Cryptocurrency?

Furthermore Cryptomedicated provided an opinion on why is our government leaning against crypto,

If you want my opinion — the government in India is probably leaning against cryptocurrency because their economy is not strong enough to handle any unanticipated shocks from highly volatile speculative investments, which are what cryptocurrencies are considered to be at this point in time.

Fact or Fiction

Fact. The entire premise behind this ring fencing decision of the government is based on one press conference statement made by Deputy governor of the RBI, Mr. Kanungo.

If they (Cryptocurrency) grow beyond a critical size, they can endanger financial stability

Why would anyone ban or try to ban anything? Because it can put the economic stability in danger. Our friend cryptomedicated is right about this. 

But there is always more than one side to the story. Along the three months from the time the decision was announced, we learnt a lot more about RBI and its methodology in determining cryptocurrency as a risk like

  • RBI did not research on Cryptocurrencies or its pros and cons before announcing the banking ban.
  • RBI announced a possibility of Central Bank Digital Currency, the report of the feasibility was supposed to be put forward by end of June. No news yet.
  • The central bank has not replied to the representation of exchanges made, and Supreme court has given it a week to respond.
  • There are multiple cases in Supreme Court now tagged together against RBI and are to be heard on July 20, 2018.

Opinion

Now, it is time for my opinion. Having been observing the situation for a while it appears that RBI has taken a decision in haste to give an answer to the constant media enquiry on the legality of cryptocurrency. If you noticed, back in December 2017, every news channel, every small to large publication and pretty much every technology inclined Youtuber and even activists like Dhruv Rathee were talking about Bitcoin.

The government was constantly being asked about their stance on Cryptocurrency to which their reply was it is not a legal tender. We’ve been told there was committee setup in March 2017, then in February 2018 and then in April 2018 who will determine the future of cryptocurrency in India. No report has been put forward yet. 

So, RBI took a very bold and smart decision to discourage people from trading cryptocurrencies, that is what the Finance Minister Mr. Arun Jaitely wanted. You remove the bank from the equation and people can’t spend their fiat to buy cryptocurrency. It is a very well thought move but still a knee jerk reaction to the situation that demands dialogue and consultancy with the industry experts.

A Banking ban wasn’t necessary. Regulations and consumer protections are. The representation from IAMAI has suggested methods for regulations and consumer protections, RBI should take it positively now because otherwise people will resort to trading on Peer to Peer exchanges or Over the counter and leave no trade of transactions.



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