Union Budget 2022 acknowledges cryptocurrency by making it taxable asset
This is the first statement coming from the country’s top banker after the government acknowledged the existence of cryptocurrency by making it a taxable asset in the Union Budget 2022. Investors be warned Das cautioned crypto investors and said there was immense risk involved.
However,
it has raised certain pertinent questions among the growing investors and the
public at large. Is financial regulation a matter of opinion? It is the duty of
the State to mitigate market failure in finance and to plan State intervention
on the problems of systemic risk, resolution, prudential regulation, and
consumer protection. Addressing the four key issues leads to the optimal
financial regulatory framework whenever facing any new situation.
Steps
taken by the state to curb natural freedom must be backed by sound logic,
evidence, and justification for enforcement of State power in the public
domain. The Indian investor and the public are largely curious to know if it is
the job of the regulators to ensure that users make profits and prevent people
from making losses.
When
we apply them into the ownership and use of cryptocurrency, there are some
concerns about consumer protection, and there is a reasonably simple strategy
which can be applied when Indian financial service providers engage with Indian
residents. There must be a structured and disciplined approach through which we
can analyse and address the situation, and discover the useful role, if any for
financial regulation.
- Inherent Systemic Risk
Does
the market present inherent systemic risk to the soundness of the overall
financial system in the country? If so, there can be market failure in the form
of a negative externality imposed upon common investors. This can be a reason
for the government to get involved, either through rules that reduce the
failure probability, or rules that make resolution more orderly. In the case of
cryptocurrency, the volumes involved in India are small and there is hardly
hint of systemic risk.
- Resolution
Is
the state facing grave and hazardous financial activities so as to present
significant cause for resolution through the route of Insolvency and Bankruptcy
Code (IBC)?
It
makes sense to resolve defaulted financial firms who do not have retail
depositors, through the IBC process of handing power to the committee of
creditors. But when faced with retail depositors of a bank, we require the
specialised Financial Resolution Corporation.
Only
in the event of the Indian financial service providers accepting cryptocurrency
deposits in ways that are akin to a bank, then the need for coverage in the
Financial Resolution Corporation would be mandated. But the simple process of
owning and trading cryptocurrency does not induce questions about resolution.
- Prudential regulation
When
financial institutions like a bank promises assured returns on investment, or
an insurance company makes promises about payouts in the future, then common
investors worry about the extent to which these promises will be upheld. To
reduce the risk faced by such investors, governments can engage in 'prudential
regulation', to bring failure probabilities down to low values. These concerns
do not arise when dealing with the process of buying, owning or transferring
cryptocurrency assets.
- Consumer protection
In
recent times, we have witnessed the Ponzi scheme failures across various states
in India duping the micro investors. The state and the financial regulatory
bodies have failed to protect the interests of the investors. Several
Commissions have been set up at the cost to the state exchequer without
tangible outcomes to the investors. Financial firms often treat consumers
unfairly. This leads to consumer retreat from formal finance to the informal
sector, such as investment in gold or overseas assets. Therefore, regulators
intervene in the working of the financial system in order to improve the larger
interest of the investors.
With
thousands of cryptocurrency assets, including some scamsters, there seems to be
a problem in terms of gullible investors making blunders and then retreating
from cryptocurrencies as a whole. This would be a retreat from an entire sector
in response to some bad apples.
Indian
regulators can help matters through a reasonably simple strategy, akin to that
used with money management. This approach can be useful in the world of
cryptocurrency. Access to the field would be for participants with knowledge.
Making losses is normal in finance. When anyone buys a share on the stock
market, there is 50 per cent chance of the share price going down the next day.
This
approach can be useful in the world of cryptocurrency. The task of financial
economic policy is limited to addressing the four key issues of systemic risk,
resolution, prudential regulation, and consumer protection. There is a large
distinction between financial regulation (using state power to force people to
behave in certain ways) versus financial advice (your views of what is optimal
for me).
The
top banker’s duty to safeguard the interests of the common investors is
certainly welcome. But the problem is when he decides to be your investment
banker too. We may think it is not useful for a class or section of our
population to own cryptocurrency assets. This is in the zone of ‘advice.’ But
one can also question investments in stocks, commodities, gold and real estate
too.
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