Cryptocurrency prohibition poses problems, according to IMF chief economist Gita Gopinath

Gopinath’s remarks come as the government prepares to introduce a bill on cryptocurrency regulation.

Gita Gopinath, the chief economist of the International Monetary Fund (IMF), said on Wednesday that cryptocurrencies are proving to be a challenge for emerging markets, and that the sector requires strong regulation.

She did say, however, that because of their decentralised nature, banning cryptocurrencies would be difficult.

Gopinath’s remarks come as the government prepares to introduce a bill on cryptocurrency regulation. However, it is understood that the Union Cabinet did not take up the Bill for consideration on Wednesday. With the current Winter Session ending on December 23, it appears unlikely that it will be tabled in Parliament.

Gita Gopinath
Gita Gopinath

Given the ongoing uncertainty surrounding Covid-19, Gopinath said that India’s fiscal and monetary policies will need to be accommodating in the coming quarters.

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“I believe that cryptocurrencies pose a unique challenge to emerging markets.” Cryptocurrencies appear to be more appealing to emerging markets than to developed economies. “However, emerging markets have exchange rate and capital flow controls, and cryptocurrencies can have an impact on that,” Gopinath, who is set to become the IMF’s first deputy managing director early next year, said.

“This industry requires a great deal of regulation. If this is being used as an investment asset, Gopinath believes that the same rules that apply to other investment classes should apply here as well.

She went on to say that banning cryptocurrencies would be difficult to implement, and that a global policy on cryptocurrency was urgently needed.

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The government had planned to introduce and pass the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 during the Winter Session. While the written listing stated that the Bill would ban all private cryptocurrencies in India, it was later clarified that the descriptor was carried over from the previous Budget Session of Parliament’s listing. The bill had not been introduced at the time, and it was not scheduled to be heard during the Monsoon Session.

Various officials, including Finance Secretary TV Somanathan, have stated that cryptocurrencies will not be permitted as legal tender but may be permitted as regulated tradable financial assets.

The Bill was in the final stages of consultation for consideration by the Cabinet, Finance Minister Nirmala Sitharaman told the Lok Sabha earlier this week. She had previously stated that the Centre would introduce a Bill that would be “well-consulted.”

According to conservative estimates from cryptocurrency exchanges, approximately 20 million Indians own cryptocurrency investments worth Rs 15,000-20,000 crore. Many in government believe that, given the sector’s rapid growth, it requires immediate regulation.

During Covid-19, Gopinath discussed fiscal and monetary challenges, saying that market recovery, including the Indian economy, was divergent. “Bigger companies are doing well, but smaller and medium-sized businesses are struggling. “This is a challenge from a policy standpoint,” she said.

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“In our opinion, India should maintain an accommodative fiscal policy for a few quarters and then gradually unwind.” Similarly, monetary policy should be accommodating, but the Reserve Bank, like all other central banks, must keep a close eye on inflation, according to Gopinath.

Inflation based on the Wholesale Price Index (WPI) reached a 12-year high of 14.23% in November, the highest since April 2005. Last month’s CPI inflation hit a three-month high of 4.91 percent.

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