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There’s a major new risk in town and it’s called crypto

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Risks keep piling up. Soaring stock indexes amid a persistent economic downturn presents a clear and present danger. The pandemic and climate change have added additional complex layers to the existing hierarchy of risks. And now a whole new one has been added: crypto speculation. Peer-to-peer crypto exchange platforms where investors can trade digital tokens for fiat currency and vice versa have started to attack retail investors. History has witnessed that when the terrain changes, as it almost always does (think chit funds or the Punjab and Maharashtra Cooperative Bank scam), retail investors usually end up being the hardest hit. .

Crypto-exchanges, driven by a Supreme Court judgment of March 2020, have stepped up their awareness exercise with retail investors. A quick recap might help here. The Reserve Bank of India (RBI) has been warning the general public since 2013 against crypto products, calling them virtual currencies (VCs) in its communication. Many government committees have also considered these products and were divided in their opinion: some advocated an outright ban while others were ambivalent. The RBI, in a circular dated April 6, 2018, ordered banks and other financial intermediaries not to deal with entities, whether individuals or institutions, trading in VCs. In its March 2020 judgment, the Supreme Court ruled that the RBI could not order banks to suspend services to crypto exchanges, mainly because the central bank was unable to show that the interface “with the Crypto products had caused damage or negative effects to these financial intermediaries. The three-member formation of the courts, however, refrained from banning or approving crypto products.

Crypto exchanges saw the decision differently and advertised aggressively on all print, TV and internet media platforms without the necessary caveats or warnings. They’ve made all kinds of allegations and promises to retail investors, such as urging them to start with just 100 or learn crypto-trading in 60 seconds and compare crypto returns with those of different asset classes. Although their actions are not strictly illegal, as there is no act or rule yet to bind them, the apathy of the Internet and Mobile Association of Indias in the exercise of some self-regulation is inexplicable compared to the haste she showed in filing the Supreme Court petition against the RBI circular on behalf of crypto-exchanges.

Ultimately, however, even crypto exchanges need to exercise good faith restraint, as crypto marketing campaigns have now reached even Tier II and III cities. These platforms have undermined the gray areas in four specific areas.

First, they need to consider whether it is appropriate to use the term currency in their communication because crypto products do not meet its classic definition. It is also dangerous because many investors might confuse it with government backed legal tender, which it certainly is not. U.S. Securities and Exchange Commission Chairman Gary Gensler recently told the Aspen Security Forum: Public fiat currencies perform all three functions of money: a store of value, a unit of account, and a means of exchange. However, no single crypto asset globally performs all the functions of money. “

Second, in their rush for yield, retail investors might ignore the fact that crypto products may not be considered assets in the truest sense. Most crypto-products do not have an underlying commodity, product, or cash flow that can provide them with economic value; A value of cryptos comes mainly from its scarcity, as mining crypto products is a specialized business, requiring a large investment in hardware and high-level coding expertise.

Third, crypto prices are extremely volatile and can change rapidly without any valid economic reason, as we have seen in recent months. What is of more concern, especially for individual customers, is that crypto-tokens are typically stored in digital wallets which can be hacked and stolen.

Finally, crypto activity is not regulated in India and any incident will leave investors stranded. Although crypto products are legal in India, they are not under any authority. As a corollary, it is also relevant to ask whether fast mushroom crypto exchanges can actually be called exchanges. They are not overseen by the Securities and Exchange Board of India and their trade matching processes or settlement mechanisms are not well known. It is also unclear whether the crypto exchanges take on the counterparty risk and eliminate the transaction risk, which the two major Indian exchanges offer.

Crypto, however, is not quite a bad word. A blockchain-based distributed ledger-based crypto-token, however, is not such a bad thing and can revolutionize many processes, such as international finance. This is for institutional investors, who are expected to be well informed.

But who will defend individual investors? Most Indian financial sector regulators are reluctant to intervene as their respective remits do not include crypto products. Given the anatomy of financial risks and their propensity to explode without warning, the government must therefore intervene immediately, demarcate the playing field and put in place firm goal posts.

(Rajrishi Singhal, is a political consultant, journalist and author)

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