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RBI Chief Warns Citizens Against Cryptocurrency

The Reserve Bank of India (RBI)

Governor gave his scornful assessment of the digital currency craze just days after the Indian government had established a taxation framework for cryptocurrencies. The taxation on these digital currencies is being seen as a form of official acceptance from the Center which has long maintained a stern judgement against it.

The budget of the financial year 2022-23 proposed a 30% tax on gains made from cryptocurrency. This was in consequence of the governor of Reserve Bank of India ( RBI), Shaktikanta Das, scrutinizing the digital currency, terming it as a “threat to macroeconomic and financial stability”.

The RBI governor said that

investors must take note of the fact that cryptocurrencies have no underlying, not even a tulip. He invoked the 17th century ‘tulip mania’- that is widely considered to be the first financial bubble. It is cited as one of the classic examples of a financial bubble where the price of an asset goes up, not due to the asset’s intrinsic value but because of speculators who want to make a profit by selling a bulb of tulip, the exotic flower. Also known as the Dutch tulip market, it occurred in Holland during early to mid-1600s. It was one of the most famous market bubbles and crashes of all time. It was these speculations that drove up the value of tulip bulbs and they traded for a big-time higher price.

It serves as a metaphor that the pitfalls that excessive speculation can cause. In today’s world they refer to the speculations regarding the market value of cryptocurrencies. These digital currencies are said to be ‘mined’ using complex algorithms that are built on the blockchain platform. The critics, however, say that cryptocurrency lacks the ‘value’ of a legal tender the supply of which, is regulated by RBI. Once they are mined, units of cryptocurrencies are traded in the secondary markets wherein their value has been very volatile. It is this volatility that concerns the Das.

Terming it as his “duty” to caution investors,

he warned them to keep in mind that investors are investing at their own risk RBI. It is these concerns that has made the central bank always hold a stern stance against private decentralized digital currencies. The bank even went to the extent of banning the banking system from aiding such trades, a decision that was struck out by the Supreme Court in the year 2020. Adding to his comments on the centralized digital currency the Center is planning to launch this year, Das said that RBI does not want to rush and is carefully going to examine every aspect before the launch of the Central Bank Digital Currency (CDBC). With regards to giving a timeline for the same, the chief governor, however, remained ambiguous. “This (CDBC) is one thing where we do not want to rush. We are carefully and cautiously examining and progressing ahead as there are multiple risks. The biggest risks are related to cyber security and possibility of counterfeiting,’ Das commented in a post-policy presser.

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