A week after the budget 2022-23 proposed 30% tax on gains made from cryptocurrency trades, Reserve Bank of India (RBI) governor Shaktikanta Das termed it as a “threat to macroeconomic and financial stability.”
Announcing the bi-monthly monetary policy outcome, Das cautioned investors by invoking the 17th century ‘tulip mania’ — which has widely been considered as the first financial bubble.
The RBI governor said that investors must remember that cryptocurrencies have no underlying value, they aren’t even worth as much as a tulip.
The central bank always maintained a strong determined stance against private digital currencies. It had banned the banking system from aiding such trades, which was struck down by the Supreme Court in 2020.
Das stated that it is his “duty” to caution investors. He told investors to keep in mind that they are investing at their own risk.
What is ‘tulip mania’
The ‘tulip mania’ of the 17th century is often cited as a classic example of a financial bubble where the price of tulips went up, not due to their inherent value but because of speculators wanting to make a profit by selling the bulb of the exotic flower.
It is also known as the ‘Dutch tulip market bubble’ and occurred in Holland during the early to mid 1600s. It was one of the most famous market bubbles and crashes of all times. Speculations drove up the value of tulip bulbs and they traded for a significantly higher price. In today’s context, it serves as a perfect example to display the pitfalls that excessive speculation can lead to.
Cryptocurrencies originate or ‘mined’ using complex algorithms built on the blockchain platform but critics say it lacks the ‘value’ of legal tender whose supply is regulated. After getting mined by running a programme, units of cryptocurrencies are traded in the secondary markets and their value has been very volatile.
Hence, the RBI governor has used this parable to caution the investors.
‘Cautiously progressing to introduce digital currency’
Shaktikanta Das said that the central bank does not want to rush and is carefully examining all aspects before the introduction of the Central Bank Digital Currency (CBDC).
He, however, declined to give any timeline for the launch of the CBDC.
“This (CBDC) 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 said in a post-policy presser.
Finance minister Nirmala Sitharaman announced in her budget speech for 20022-23 that the RBI will introduce a digital currency in the next financial year beginning April 2022 to boost the digital economy and for more efficient currency management.
(With inputs from agencies)
Comments are closed, but trackbacks and pingbacks are open.