I am thinking of investing a small amount of money in cryptocurrency. For the last three weeks, I have been listening to and reading articles about the situation in India. What follows is my summary.
I had forgotten about cryptocurrencies for the longest time since my initial fascination for it in 2017. The fascination hit me again when I listened to an episode of Paisa Vaisa.
Coldfusion on YouTube has a video about the ways in which the financial system today is using blockchain technology. Cryptocurrency is also built on top of blockchain technology. Some banks are buying cryptocurrency as a hedge against fiat currency while others are using it to save heavily on international transfers.
In 2018, RBI had banned banks from allowing their accounts to be used for purchase or sale of cryptocurrency. Combined with a paper by a Finance Secretary in the Ministry of Finance suggesting that cryptocurrency be banned, the public interpreted this to mean that cryptocurrency was illegal.
In 2020, the Supreme Court said that RBI could not stop financial institutions from providing banking services to cryptocurrency exchanges. After the verdict, though, there have been news reports about banning trade in cryptocurrency and mining of cryptocurrency.
In the filings of Berkshire Hathaway, it was disclosed that they had sold banking stocks and had bought shares of a gold mining company. Robert Kiyosaki saw that as Warren Buffet losing confidence in fiat currency (the US dollar) and buying a stake in gold. In a podcast episode, Kiyosaki saw this as a validation of his position and a significant change in the market. He also makes a case for buying bitcoins on his blog, later in the day.
The Indian Rupee is not fully convertible with the US dollar. But, most international currencies are pegged to the dollar. Countries like Iran, China and Russia are trying to introduce their own cryptocurrencies in order to reduce their dependence on the US dollar. It is speculated that various central banks are purchasing cryptocurrency as a way to hedge their own position in the cryptocurrency market. In a globalized world, we could feel the impact at some point in the future. Maybe later than when it occurs elsewhere as our central bank protects the rupee.
People who fought the case in the Supreme Court against RBI’s ban say that the Government has stepped down it’s stance against cryptocurrency from wanting to ban it to wanting to regulate it.
Coindesk, a news organisation that reports on cryptocurrencies does talk about the limitations that India has in terms of cryptocurrencies. Mining or creating cryptocurrency is indirectly banned in India. The computers required to mine cryptocurrency are specific ones called ASIC machines. The import of these machines into India is banned. A few enthusiasts mine cryptocurrency using GPU. The Government further threatened miners by arresting a few of them. It seems that the remaining miners are planing to migrate to countries like Armenia.
The 2020 verdict however meant that cryptocurrency exchanges could now operate in India. This means that you can now buy using cryptocurrency by transferring money from an Indian bank account or a financial service provider. However, there is no regulation of cryptocurrency. Things now are working on good faith between exchanges and consumers who want to purchase cryptocurrency.
The exchanges want SEBI to be their regulator. They are already performing due diligence and complying to KYC requirements as mandated by SEBI. However, payments in cryptocurrency might require RBI regulation.
I do not see myself wanting to use cryptocurrency to make a payment. I wanted to hold the currency as a diversified asset that I can hold or one that I can accumulate over time just like one would hold gold or stocks.
If you are considering purchase of a cryptocurrency, please do not see this as professional advice. I am learning about this field as well. The Coindesk story that I mentioned above, does suggest that there is at least one cryptocurrency advisor whom you may want to consult if you plan to purchase in large amounts.