Opinion: Decision Whether To Embrace Cryptocurrencies Or To 'Ban' Lies With People Of India, Not RBI

British Legacy of Reserve Bank of India

The Reserve Bank of India (RBI) was in news recently for behind the scenes attempts to influence the ban of cryptocurrencies in India and lobbying for criminal punishment for cryptocurrency holders. They launched a dirty whisper campaign in Indian newspapers by selectively leaking quotes from unnamed senior officials claiming an imminent ban on cryptocurrencies, throwing the nascent industry into a state of despondency.

The matter culminated when an article appeared in Reuters, quoting an unknown senior official--supposedly in the know--warning of instant and immediate ban with imprisonment for crypto holders. This contradicted a statement given by the Finance Minister, Nirmala Sitharaman in the India Today conclave just a day before about keeping a window of innovation open in this space. The Reuters article was then relayed by all major news outlets in India without any further verification or cross-checks.

The previous attempts by the RBI to impose a shadowban on cryptocurrencies did not survive legal scrutiny by the Supreme Court of India and now it is apparent that even the Finance Ministry is publicly moving away from attempts to completely ban cryptocurrencies.

In light of the public display of clash of institutions, the role of the RBI has to be scrutinized deeply and public debate needs to happen to determine whether Indian people will benefit from its continued existence, or whether its position is to oppose innovation.

The dystopian behaviour of the RBI can be traced to the British origins of the Institution. Let's dwell on how British Institutions operated in India. They were uniformly characterized by poor representation of the Indian perspective. They were working for narrow self-interests often contrary to the interests of the general Indian population. They were unhesitant from the usage of threats and imprisonments to get their way when half attempts of persuasion failed.

The RBI was created as a private bank in 1935, as a result of the Hilton Young Commission report, which was submitted to His Majesty Government in 1926. The commission was formed after botched attempts of the Babington Smith Committee to transition Imperial India away from the silver standard to the gold standard failed.

By 1929, the Great Depression struck leading to a rapid exodus of both gold and silver. So the 1926 report was dusted off and rapidly executed in 1935 to create an institution that would ensure Imperial Government debts can double up as currency, obviating the need to keep gold and silver. A light reading of the Hilton Young Commission report provides clues of the background-position of India in 1926.

Paragraph 20 for instance: "India is perhaps the only country, among the great trading countries of the world, in which the Government exercises direct control over currency in general and over the note issue in particular."

India was then one of the great trading nations of the world then, partly because of its infinite potential to convert the Indian rupee into silver and vice versa freely.

The RBI was nationalised in 1949 and transformed from a private bank with independent shareholders managing currency and reserve functions to a dreaded government bureaucracy that imposed the tightest currency controls on the people of India, a legacy which is haunting us till now.

From about 10 per cent share in global trade in 1935 since its formation, the currency controls supervised by the RBI has overseen the share fall to less than 2.5 per cent in 2021.

Role in Draconian Foreign Exchange controls

The RBI after independence has presided over a brutal exchange control regime that has seen numerous arrests and stifling paperwork for any transaction involving foreign exchange as late as 1998.

An Indian who goes to work in the Middle-East can freely transfer the fruits of his labour to any country including India. The moment he landed back in India in the 1980s, if he tried to do the same, he would be arrested for violating the Foreign Exchange Regulation Act 1973.

At a time when foreigners were creating international companies like Sony, Toshiba, IBM, Citibank, and Coca Cola with full freedom of foreign exchange conversions, Indian entrepreneurs under auspices of the RBI were being harassed and imprisoned if any of their products needed foreign inputs.

Under the eyes of the RBI, the maximum networth of an Indian was 80 USD per year. Even after currency reforms in 1999, the RBI prevented Indians from investing freely in foreign stocks, whereas foreign nationals under full freedom of their domestic foreign exchange laws could invest freely in Indian stocks. Indian ownership of foreign stock markets is almost close to zero. Whereas foreign ownership of Indian publicly traded stocks is more than 20 per cent.

Which decent society gives preferential treatment to foreigners, and creates insurmountable barriers for its nationals? It's the same pattern continuing in Cryptocurrencies. Foreigners have accumulated more than 1.7 trillion USD in net wealth through Cryptocurrencies from 2009 to 2021. Whereas for Indians, the RBI is still applying the FERA mindset to deny them those rights. It is reprehensible how minimal is Indian ownership and participation in this greatest wealth creation phenomenon in the 21st century.

Cryptocurrencies offer India a promise of a completely new start. The country in a single shot can get rid of all bureaucracy, move beyond the taints of oppressive regulatory regimes, and transmute Indian entrepreneurs straight away into financial freedom that Indians truly deserved after independence but has been denied.

This is a millennium opportunity that cannot be lost. This is our generational opportunity to take back the economic leadership of the world which we once had.

A bureaucracy gone astray

India has a chain of command where "We the people of India" occupy the apex of the pyramid as per our constitutional system. It's not the President of India who is at the top of the privilege list. It is the people of India. The Prime Minister of India is not the king of India. He is not the ruler of India rather the servant of the people of India.

The government of India exists to serve the interests of the people of India. When fundamental new innovations like cryptocurrencies emerge, then it is not important whether the government loses taxes or not. It is not important whether or not some people are performing economic transactions outside the government control structure. The first order of precedence is whether the innovation is improving the lives of the people.

If the innovation is beneficial to the economic well-being of the people directly, even at the cost of government finances, the interests of the common people will overrule the interests of the government.

In a democracy, tools and techniques of governance can change. If a choice needs to be made between the interests of the government and the interests of the people, and if they are in conflict, then the interests of the people will override.

A government bureaucracy on its own cannot subvert that democratic process. If the Finance Minister makes a public statement assuring the people of India that a calibrated approach will be taken for a critical innovation, government bureaucrats cannot undermine that position through unauthorized media leaks. And they definitely cannot do scaremongering through newspapers since it is unauthorized and unapproved behaviour as per their own service manuals.

If they have an opinion, they should come out with a white paper in public, explain their stance, and put it in front of the court of people. The RBI officials has shown scant respect for the public discourse process in the matter of cryptocurrencies. They have never explained their stance properly. The response to the previous Right to Information petitions has been pathetic. They have delayed responses to the Supreme Court queries as long as they could.

The decision of whether to embrace cryptocurrencies or to ban them lies with the people of India directly. And, that decision will be made after all dimensions of these innovations are understood. If the innovation makes the entire present currency control structure irrelevant, it's for the people of India to take a final call on it. The RBI or its officials cannot pre-empt that process by applying duress.

Indian banking sector needing continuous taxpayer support

The Hilton Young commission in its 1926 report felt that any institution that needs to control the currency of the country also needs to control the credit quality of the country to effectively ensure currency stability. Hence, the RBI was given additional responsibility to supervise the banking sector in India.

Over 85 years of being a steward of banking under the RBI supervision, India does not have a single bank in the top 30 banks of the world in terms of asset size and quality whereas Great Britain, which has an economy of size comparable to India, has 4 banks in the top 30.

Even smaller economies like Canada and Spain have world-class banks in the top 30 list. In 1935, the Imperial Bank of India (now known as the State Bank of India) was one of the best banks in the world. After being supervised by the Reserve Bank of India for over 85 years, it has been reduced to a struggling bank necessitating periodic public cash infusion.

India has the lowest percentage of population among which banking is the top 10 economies of the world. Almost all banks in India have issued poor quality loans consistently to contentious businesses. Every dozen years, Indian banks are required to be rescued by Indian taxpayers. None of the RBI officials has gone to prison for a host of banking failure and corruption cases.

Although, countless ordinary Indian businessmen have been harassed and imprisoned for non-payment of loans which the RBI should not have allowed to be disbursed in the first place. Isn't it ironic that the RBI is asking for a 10-year prison sentence for ordinary people just for putting their honest and hard-earned money into cryptocurrencies?

Whereas the officials of RBI go scot-free for numerous banking scams in India over decades, often with criminal negligence on behalf of RBI officials. They always managed to project the entrepreneur as the bad guy when a loan turns bad, and always escaped scrutiny for their own role.

It just seems that the RBI has two different standards for judgement. One standard where its officers can never be touched or arrested no matter the magnitude of banking crimes happening as a consequence of the decisions of its officers. Another standard, where it is perfectly acceptable to arrest Indian people for honestly seeking economic betterment.

With this history of banking performance, the RBI should not be permitted to deprive Indian people of world-class banking when innovations are emerging in the form of cryptocurrencies. The old rotten structure should not be allowed to taint the bright future.

No innovation in the Indian banking sector

The RBI is probably the only central bank among the advanced economies that decides how many branches a bank can open and what ATMs can do. It also decides whether SMS is required to be sent after a transaction. Small operational decisions like what products to offer, what rates to offer, which usually should be performed inside the bank all must be approved by the Central bank.

To grow innovation, creative destruction is an essential condition. Newer forms of banking must emerge in marketplaces freely and offer better and efficient services challenging the incumbent.

Newer and multiple choices must be offered to customers by newer entities that would force the incumbent to make rapid changes to respond. If the incumbent is too slow and becomes fossilized, it must fail. If failure is not permitted, then the system freezes and innovation stops.

The western world sees massive innovations in the banking sector originated by common people like independent third party ATMs in stores and petrol stations, pure online banks, narrow functional banks, and a multitude of credit and investment products, none of which goes to the Central Bank for approval.

In India, if Times Group launches an innocuous international money transfer service using Bollywood actor, Amitabh Bachchan as a brand ambassador, it gets shut down instantly by the RBI.

Past record of being an agency actively opposing innovation

The RBI wipes the other oxygen for innovation: Experimentation Space. Our entrepreneurs should be making consistent innovations and newer experiments, challenging the status quo all the time. But the dark monster in the room called the RBI will never allow it.

Recently, two young entrepreneurs from Unocoin one of the innovative Crypro-exchanges in Bangalore found out this ugly truth after being thrown into prison for creating a cash dispensing machine for their own customers. How can the soul of society even tolerate consideration of a prison sentence for entrepreneurs wanting to improve the customer experience?

How unfair it is that entrepreneurs of India go into prison for innovation in the blink of an eye when western entrepreneurs can bump off even the sitting President of their country of their platform.

It takes no genius to recognize that if bureaucrats are put in charge of innovation, we get neither innovation nor stability. As decay of the banking sector in the peak years of Indian economic growth indicates. From 2000 to 2020, when the Indian Economy was making ravishing strides, our banks were getting saddled with bad debts almost to the point of extinction unless taxpayer's money bailed them out. How ironic?

To reclaim the innovative spirit of Indian society in the banking sector, the RBI has to step back. We are a culture that provided leading innovation for centuries, and even now our people run the largest corporations in the world with a finesse that is unrivalled. Our nationalization experiment has failed. Our 1935 Central Bank experiment has failed. It is time to recognize the obvious.

India needs to rediscover the inner spirit in the banking and finance sector. We need to rejuvenate our souls. We need ordinary people to be empowered by freedoms that can permit creative destruction and experimentation space free without fear or favour. If a choice needs to be made between the RBI and Cryptocurrencies, the decision is very obvious.