RBI deputy governor: Banning cryptocurrencies is 'the smartest option'

Rabi Sankar has taken a tough stance on cryptocurrencies, citing the "destabilizing effect" it could have on the country's fiat currency.

T. Rabi Sankar of the Reserve Bank of India (India’s central bank) likened cryptocurrencies to Ponzi schemes and said that banning them rather than regulating them would be the Indian government’s “sensible option.”

“We also see that cryptocurrencies are not suitable to be defined as currencies, assets or commodities,” RBI Deputy Governor Sankar told the audience during his keynote address on February 14.

“Cryptocurrency is not a currency, nor is it a financial asset or a physical asset, not even a digital asset. Therefore, it cannot be regulated by any financial sector regulator. It is impossible to regulate something that cannot be defined.”

Sankar believes that regulating cryptocurrencies will eventually condone their use as a store of value, or even a currency in some cases. Merely regulating it is tantamount to encouraging its use within the framework set by the government. However, he acknowledged that if cryptocurrency were banned, some people would still use it, as "drug trafficking is still a rampant phenomenon despite the ban."

He also noted that allowing cryptocurrencies to exist in a fiat-dominated ecosystem “is bound to have destabilizing effects on a country’s monetary and fiscal stability.” Sankar said that if the cryptocurrency is regulated and can be used as an investment asset, its utility as a store of value will increase and could attract more users away from the rupee.

Sankar attacked the true value of cryptocurrencies, saying:

“Furthermore, unlike the value of the rupee, which is based on monetary policy and its legal tender status, the value of cryptoassets is entirely dependent on the expectation that others will also value and use them.”

India is one of many countries where cryptocurrency companies and lawmakers are demanding clearer regulation to guide their actions. Without such clarity, it's difficult for businesses to develop long-term plans for their products and services to ensure they don't break any laws.

On Feb. 11, Finance Minister Nirmala Sitharaman said she would not make an immediate decision on whether to legalize or ban cryptocurrencies, which would keep India in a state of regulatory instability for a long time.

The Indian government has been experimenting with its ability to deploy a central bank digital currency (CBDC). Sitharaman revealed on February 1 that she expects to launch a digital rupee scheme by 2023 to boost economic growth.