As Parliament prepares for the debate on the cryptocurrency law, there is some ambiguity about how exactly the government intends to deal with private cryptocurrencies. That may be because it is unclear exactly how to deal with it, an issue likely to be common to central bankers around the world. They are all in a bit of a dilemma about how to regulate cryptos, whether to lock them down completely or allow them to thrive as assets. The bill says it is important to ban all private cryptocurrencies. This suggests that these have no chance of being approved as legal tender. How exactly these are to be banned is not immediately clear, however, as many of them operate outside the scope of the law.

At the same time, the bill proposes exemptions so that the underlying technology is made available, as it can be extremely useful in the payments space. That’s easier said than done. We want to take advantage of the breakthrough technology, but we just cannot afford to risk asset inflation and a bubble forming. The government and the RBI have to put their heads together here. It is unlikely that too many cryptos will survive anyway as the number of use cases is limited. Nonetheless, RBI Governor Shaktikanta Das is justified in worrying that cryptos could lead to financial instability if investments in them, made by over-indebted individuals and companies, go bust. The RBI fears that the government’s imprimatur for cryptos could encourage more investments and that it could end badly if they lose value. These concerns are justified, but like other countries, India is using blockchain technology too much to make internet micropayments and contracts cheaper and easier.

As former RBI governor Raghuram Rajan noted, there is little danger of the Indian currency becoming dollarized; Given the high volatility surrounding cryptos, the rupee would be a preferred option and therefore the central bank should have no trouble ensuring that the local currency is not being replaced by cryptos. This would rule out any risks to the shaping of monetary policy. The problem, as Rajan pointed out, is that regulators around the world are struggling to understand cryptos and are therefore unsure of how to regulate them. Even if some players are able to beat the law, it can do significant damage.

In light of this, the Indian government would do well not to endorse cryptocurrencies and keep a close eye on them. There could be a mechanism to keep track of the transactions in the absence of an underlying deal. The government could also insist on screening these players and insisting that they provide information so that the government can prevent fraud. While you could check the investments and their value with stablecoins, as they are backed by hard currencies, it is much more difficult to handle with standard cryptos, which have no intrinsic value and whose prices fluctuate. Should something go wrong – which is not impossible – the supervisory authorities are responsible for it.

It is a difficult situation for regulators as it is unlikely that investments in cryptos will be halted even if the government prohibits them. The government and central bank must therefore try to find a way to ensure that investments are not made from loans from local lenders – banks, NBFCs, etc. To this end, banks need to be vigilant in disbursing unsecured personal loans to individuals and small businesses. Systemic risks of all kinds must be averted. In the meantime, India could learn from other countries’ policies.