India and The ESG impact of Crypto Currencies

Capt Tapas Majumdar

13 Mar 2022

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The Classification challenges 

To start with the very phrase ‘Currency’ as in ‘Crypto Currency’ needs to be understood. Currency is a system of money used in a particular country. Money in any form when in actual use, is a medium of exchange. There is transmission from person to person and has general acceptance and is prevalent in the ecosystem. So technically speaking Crypto Currencies qualifies as ‘Currency’. However, the phenomenal growth in the valuation of this ‘currency’ classifies it as an asset as they are less used as a currency and it's more as an intangible digital asset. Investments in Crypto currencies in India have stands at $10 billion in November 2021, from $0.9 billion in April 2020, according to Credit Rating for Exchanges Blockchains and Coin Offerings. The total number of crypto investors in India stands is more than a crore and with total investment are to the tune of Rs 6 lakh crores as per the advertisement released by a group of 13-members including Internet and Mobile Association of India, Blockchain& Crypto Assets Council, crypto exchanges, and others that are part of crypto investment ecosystem in India. That implies that it is also used as an investment tool not intended to be used specifically as a currency, but also an asset or even as a commodity. 

So, currency or assets or commodity is the first question. 

The Legislative Challenge

The Reserve Bank of India took the first step in limiting / discouraging the use of cryptocurrency. In April 2018, a circular issued by the Reserve Bank of India, directed the banks and entities regulated by the Reserve Bank of India, not to deal in virtual currencies and end the existing relationship with entities that dealt with such transactions. While the circular was well intended given that India was just about beginning to face this new and relatively unknown reality, the circular lacked the spine to hold on its own. 

The judgment of the Supreme Court in Internet and mobile association of India verses Reserve Bank of India delivered in March 2020, set aside the circular. Supreme Court lifted the ban with a strong resort to reason. Supreme Court concluded that the actions of the Reserve Bank of India was not proportionate to the alleged threat posed by crypto currency. While every crypto currency transaction has the potential to mask the transaction details that can possibly be a suspect in a plethora of violation, did not conclusively imply that every transaction made would necessarily be violative. The only documented guideline aimed at giving some direction was tethered. 

The union government initially was clear; ban crypto currency. Subsequently there were discussions of banning they private crypto exchanges. Now the challenge was, that post the lifting of the ban by the supreme court, close to 15 exchanges are operating and large players in the financial markets, like Paytm have declared their intent to participate, once government makes it ‘legal’ legal. Currently, the status is more of ‘not illegal’. A bill to that effect ‘Cryptocurrency and Regulation of Official Currency Bill, 2021’ planned. However, it is yet to be tabled in the parliament.

So ‘not illegal for now, and not clear about the ‘legal’ status. 

The Social Challenge

It is the younger generation that is driving the investments in crypto currency. 

“The average age of a crypto investor is about 24. It is a very young demography. And for more than 65% of our users, crypto is the first asset class that they are investing in besides having a bank fixed deposit,” says Ashish Singhal, co-founder and CEO, CoinSwitch Kuber—a cryptocurrency exchange platform with over nine million registered users (ref: https://www.fortuneindia.com/multimedia/average-indian-crypto-investor-is-24/105779)

Another survey conducted among 114,000 BuyUcoin users has revealed that most of their investors in India are from the 18-34 years age group. The survey revealed that the age group of 25-34 years had the highest share of ether investors, accounting for 36.04% of total investors, followed by 18-24 years at 29.36%, then 35-44 years at 17.36% and 45-54 years at 8.89%. The 55-64 years age group had 4.86% of the investors followed by over 65 years at 2.95%. (https://www.livemint.com/market/cryptocurrency/65-ether-investors-in-india-are-below-34-years-survey-11621852022839.html)

It will be naive to believe that all the investors invested in crypto currency will score high or at least average on their knowledge on the asset class (given that they choose to use it as an asset rather than a currency). The fact also remains that due to lack of regulatory clarity, there are no remedial measures that are specific to the asset class that can protect them in case of any fraud or other matters requiring a legal framework. They will have to resort to current measure that may not be able to support them effectively. 

Hope and positive thinking seem to be the strategy; and given the absence of any investor support mechanism; Crypto currency gets many notches up on the risk scale. 

The ‘G’ impact of Crypto Currencies.

Crypto currencies brought about a path breaking approach two payments. It unshackled payments from regulations and control. Clearly the current regulations and control mechanisms will fall awfully short in any attempt to regulate. While it is clearly becoming a preferred choice, the lack of clarity in classifying crypto currency and putting in place mechanisms that will protect investors is an impending risk area. It also puts to question the status off the legal currency of a country, unless of course we are moving towards of globally unified currency. But then again the entire question off the relevance off the existing structures come to question.

The ‘S’ impact of Crypto Currencies.

While the lack of clear guidelines has a potential risk for investors, a greater potential risk is building up due to lack of clear understanding of crypto currencies from an awareness and consumer education point of view. This often gives way to misinformation

The ‘E’ impact of Crypto Currencies.

The use of crypto currencies, data mining, is consuming large amount of electricity specially in countries where electricity is generated through the use of fossil fuel. The total amount of electricity consumed in data mining exceeds the electricity consumption off many countries. If this goes unchecked the environmental challenge, it's only going to deepen further.

Conclusion 

Change is always tough, disruption is even tougher. New technologies will always come, change will only get faster, our reactions to such change has to be quicker. The new does not necessarily have to replace the old, but can coexist. In a fast changing environment it is highly unlikely that you will never find a perfect solution to change, and even if you do, the validity of it may not be perpetual.