However, it will be some time before this bill becomes law. Meanwhile, if the stories are to be believed, millions of Indians are trading cryptocurrencies, on both Indian and foreign crypto exchanges. It is worrying that this volume of money is being used, apparently as an investment and yet there is no regulatory oversight as to what happens to this money. People who buy crypto think it is an investment, that it is promoted (albeit in a slightly disguised way) as an investment and yet there is no provenance for the very basics of an investing activity. .
What do I mean by the basics? When I buy stocks, I go to a stockbroker. I transfer money to the broker from my bank account and in return I see numbers appear on the screen where I trade. These numbers claim to tell me that I now own stocks. Where do these figures come from? How do I know that there is an underlying reality related to them? I know this because the stock market and all of the entities related to it are thoroughly regulated. Brokers are members of an exchange and there is a separate entity, a stock custodian, which ties all of this to the underlying reality of existence and ownership of what I gave my money for. I receive live information about what is happening to my money from several independent entities that operate under intense regulatory control.
There are equivalent regulatory structures for banks, mutual funds, insurance, bonds, and just about anything that involves managing other people’s money. Entities called exchanges are nothing of the sort in a legal sense. These are companies that take your money and in return show you numbers and a graph on your screen.
No one seems to be curious about the exact modus operandi of these exchanges. There are simple questions that can be asked, drawing a parallel with other types of exchanges
- Is there publicly verifiable evidence that the underlying cryptocurrencies actually exist in possession of the exchanges in the required quantum?
- When one investor buys one cryptocurrency and another sells the same, do these self-proclaimed exchanges compensate for it or do they independently buy and sell the underlying in a parent market for each of them?
- If they clean it up, how often do they reconcile actual holdings with a parent market? Since cryptocurrencies are notoriously volatile, what happens to the value gaps that need to be created?
- In particular, the day news of the impending law arrived, a huge gap created between Indian and international cryptocurrency prices. Certainly, a lot of money must have been won or lost in this arbitrage opportunity. Can anyone explain? Not an explanation by waving a hand but a real explanation in rupees-paisa.
- If these self-proclaimed exchanges pool investments and then pass them on to a parent market, then why can’t they be treated like mutual funds because that’s exactly what funds do? This is of course more of a question for Sebi to answer.
Let us take a hypothetical situation: One day, a new law puts an end to the activity of these so-called exchanges. When the music stops, will investors find out they own exactly what their app screens are showing? Can these exchanges publicly publish verifiable information to prove it? I suspect they can’t, because if they could have been so transparent, they already would have been. So if there really are millions of Indians in all of this, can someone in a position of authority start asking serious questions?
(The author is CEO, Value Research)