Archrivals India and Pakistan agree on one thing: cryptos are bad

Avowed enemies who disagree on multiple regional issues, India and Pakistan are on the same page when it comes to dealing with cryptocurrencies. Their respective central banks have come down equally hard on decentralised, digital currencies, which they fear promote more speculative investments than finance. 

In the past few days, the Reserve Bank of India (RBI) and the State Bank of Pakistan (SBP) have joined peers from half a dozen other nations to renounce virtual currencies such as Bitcoin. 

RBI Governor Shaktikanta Das warned people who have piled up money in cryptocurrencies, saying they were doing it at their own risk. 

Cryptocurrencies have no underlying value, not even that of a tulip, he said in an apparent reference to the 17th-century speculative bubble known as Tulip Mania. 

His comments came just days after the Indian government imposed a high tax on transactions made using the digital currencies. 

In neighbouring Pakistan, where the central bank has struggled for years to include more people in the formal financial system, SBP Governor Raza Baqir said cryptocurrencies offer little economic utility in a developing country like his. 

“[...] private digital currencies are mostly speculative in nature and have not provided any robust use case and real economic benefits especially to underdeveloped countries like Pakistan,” he said in a recent speech. 

Cryptocurrencies emerged more than a decade ago as a way for people to make payments and buy things without using banks or other financial intermediaries. 

The transactions are recorded on a distributed ledger known as a blockchain, which everyone can see. 

But Bitcoin, the most valued and popular cryptocurrency, is not backed by any government or central bank, as is the case with a US dollar or Turkish lira. 

Its value basically depends on what the market is willing to pay for it. 

Cryptocurrency backers argue that using Bitcoins or other digital tokens will go on to democratise finance and is a way to get back at large banks, which they blame for the financial crash of 2008. 

Central bankers see things differently. They point out that private digital currencies have become speculative investments more than used to facilitate online trade - buying and selling real stuff. 

Head of Hungary’s central bank, Gyorgy Matolcsy, has likened cryptos to financial pyramids that depend on new investors pouring in money to sustain the currency’s value. 

"The breakneck growth and market value of cryptocurrencies is defined primarily by speculative demand for future growth, which creates bubbles,” he said in recent remarks. 

China, one of the largest markets for digital tokens, and Russia have already banned the trading and mining of cryptocurrencies.

In the European Union, officials have voiced concern about the high electricity consumption of mining operations, which are made up of powerful computers solving puzzles and recording transactions to earn cryptocurrencies. 

Even Bitcoin’s origin is steeped in illicit trade. The digital currency was first used a decade ago to buy drugs on a dark web portal Silk Road. Many hackers demand payments in cryptocurrencies, making it difficult for authorities to trace them. 

Concerns haven’t dampened interest in the potential of revolutionary digital cash. In September, El Salvador allowed Bitcoin’s use as a legal tender alongside the US dollar despite the International Monetary Fund (IMF) warnings. 

 Bankers have offered an alternative in the shape of Central Bank Digital Currencies or CBDC. 

CBDCs are no different than the money in your bank account or digital wallet, which you use to make online purchases. But a CBDC is a direct liability to the central bank and the chances of you losing that money are almost nil. 

The digital cash kept in a US dollar or an Indian rupee account in a bank can be lost if the bank goes bankrupt. 

With the CBDC, the Central bankers aim to make online transactions faster and cheaper by eliminating the role of intermediary banks such as HSBC. It will enable direct peer-to-peer transfers and payments to vendors. 

According to the International Monetary Fund, around 100 countries are in different stages of introducing the CBDC. Some of them, such as the Bahamas and Nigeria, have already launched their version of CBDC.