That cryptocurrency scoffs at state-run currency has been clear all along. Consider the pitch made by Bitcoin’s myth of origin: a token of exchange managed by a state is subject to both political pressure and human folly, while nobody can meddle with one that is run by software codes and keeps its online ledgers open to scrutiny. Only recently, however, has it made central banks sit up. In 2018, the Reserve Bank of India (RBI) imposed a crypto ban. In 2020, our apex court lifted it, ruling it too harsh. RBI has had reason to persist. As it is, capital inflows and outflows tend to blunt its tools of monetary policy as it tries to balance the rupee’s internal value (and local cost of credit) with its external volatility. Should crypto transactions catch on, its levers could weaken. As a pre-emptive, RBI now has its own digital currency in the works, even as Parliament prepares to outlaw others. This will be held up as a blow in favour of the rupee, no doubt, but it won’t quieten the big argument that crypto’s spectacular success has stirred.

So far, Bitcoin and its ilk have functioned as speculative assets—like gold—more than currencies. On the face of it, this should reduce unease over their disruptive potential. But there is a message in the recent explosion of crypto demand that deserves attention. Bitcoin sells at about $48,000 apiece today. This is almost a ten-fold rise since the covid crisis sent currency presses whirring everywhere, most furiously in the West. The more money that gets printed, the stronger Bitcoin’s allure. Its very debut back in 2009 was a response to the Great Recession anxiety in some circles that ever since the US dollar abandoned gold as its peg in 1971, it was exposed to debasement through oversupply, and even if retail prices did not flare up right away, vast volumes of easy money thrown at each crisis would inflate asset bubbles and thus create conditions for the next. In this view, America’s monetary expansion of 2001 set up the quake seven years later, and the enormous easing in its wake has only been taken to new extremes by the covid seizures of 2020. With ever larger sums of cash being spewed out, we are being pushed in the direction of Modern Monetary Theory (MMT), which argues that the only limit on money creation is an outbreak of retail inflation. Bitcoin, in contrast, is kept pegged by the design of its software, which explicitly caps the supply of its tokens. Its appeal lies at the opposite end of a vignette of views on how much money can safely be created, and its global popularity as an inflation hedge (to rival gold) is essentially a rebuke to central banks in general.

Neither extreme of that vignette holds merit. MMT cheerfully overlooks how inflated assets distort the market-led allocation of resources in an economy, while a peg for a state currency would only cramp its potential. Money supply should be a function of its productive capacity, not of bullion bars. So long as price signals don’t misfire, a scarcity of cash should not hold the generation of value back. RBI’s e-rupee will presumably have no cap, and if it succeeds, it could serve as a policy aid too. But we need not clamp down on cryptocurrency for RBI to do a prudent job of managing our rupee. Not only will a ban be hard to enforce, clunky legislation could end up holding back other shared-ledger and fintech innovations. All considered, on balance, let’s not rush this.

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