Cryptocurrency - Asset or Currency?

Cryptocurrency is seen as an important component of future economies and financial models, but has remained on the fringes of Indian economy so far.

CRYPTOCURRENCY & REGULATION OF OFFICIAL DIGITAL CURRENCY BILL

The proposed Cryptocurrency and Regulation of Official Digital Currency Bill has suddenly focussed all attention on the subject. It is supposed to create a facilitative framework for a Central Bank Digital Currency (CBDC), and restrict use of selective cryptocurrencies. There is nothing unusual about Reserve Bank of India introducing its own digital currency, which will be a kind of ‘digital rupee’. Many governments across the world are doing that.

The proposed cryptocurrency ban in India has generated fear. Indians have just about started tasting the risk and rewards of cryptocurrency. Bitcoin remains the most popular cryptocurrency, though Dogecoin has attracted recent attention thanks to Elon Musk. Ethereum is a familiar name for the initiated. The remaining cryptocurrency list of Litecoin, Cardano, Polkadot, Stellar, ChainLink, BinanceCoin, Tether and many others does not attract the same level of interest.

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IS CRYPTOCURRENCY (BITCOIN) AN ASSET OR CURRENCY?

Cryptocurrency is being hailed as the currency of the future. Startups, financial institutions and corporates are building systems which will accept payments through cryptocurrency. It will facilitate international transactions.

But analysis of the Bitcoin public ledger shows that a third of the book is owned by investors who only receive bitcoin, but never send it out. It proves that Bitcoin is being seen as an asset class, rather than a medium of exchange.

Users are divided into

Active Investors
Receivers
Receive only investors
Hybrid users
Testers

(Source: SSRN Papers)

The future cannot be predicted as of now.

WHAT DOES THE INDIAN GOVERNANCE MODEL FEAR?

It fears a flight of Indian money to other countries or diversion to illegal purposes, unregulated by the Reserve Bank of India.

If cryptocurrency is treated as an asset, it competes with financial instruments such as stocks, government bonds, bank deposits. It it is treated as currency, it competes with fiat currency.

Bitcoin is often compared to gold (which is an important asset class in the Indian mindset), given that the supply of bitcoin is limited. It will freeze at 21 million in 2040, after the value being halved every 4 years. This aspect also makes it a deflationary asset, making it difficult to predict future value.

Cryptocurrency can flow from one virtual wallet to another, not always through the regular banking system. Cryptocurrency is owned through a code, which cannot be hacked or tracked in any manner by the legal system, in the course of investigation of financial or other crimes.

The fear is not unfounded. Cryptocurrency has the potential to become an equivalent of ‘Swiss banks’ for unaccounted money in India. It will help unethical entities to spread the money all over the world, in a manner that it cannot be traced easily.

WHAT DOES THE INDIAN INVESTOR WANT?

Would you be happy investing money in Bitcoin as an asset class, and using Central Bank Digital Currency (CBDC) to make easily trackable payments in India?

Bitcoin appears to be an alternative haven for parking money, in times when stock prices are uncertain and Indian currency is depreciated. It can be a temporary store of value, and some people can get rich by exiting at the right time. There is a hunger for ‘unregulated’ asset classes, which are not subject to political uncertainty and sudden change in policies.

The risk is high, but so are rewards. Taxes paid on gains should help the national exchequer.

It appears to be a via media, though opinions may widely and sharply vary on this.