Are you missing out on “the biggest financial revolution in modern history which will forever change the way monetary transactions are executed?” Or you may be falling prey to an orchestrated sales pitch by the crypto industry to make a very risky investment.
Research shows that those who plunge into uncharted trading territory and manage to encash in time, often make serious money—the Bitcoin billionaires are an example. But a majority of ordinary people are late entrants, carried away by anecdotal success stories and the promise of easy riches, only to end up as losers.
Almost every day, Moneylife receives press releases or pitches for ‘native advertisements/sponsored posts’ offering significant payments for two kinds of businesses—gaming and crypto currencies. While we say no to the possibility of misleading readers for money, a majority of publications and advertising avenues have no such qualms—least of all organisers of cricket matches. Social media may have questioned crypto currencies dominating advertisements during cricket matches, but cricket control boards probably feel protected by the politicians across parties who dominate and control them and so they eagerly court these dubious sponsors.
The government’s stubborn reluctance to ban or regulate the spread of crypto currencies through advertisements, paid-influencers and content marketing, to create the same cult-like mania promoted by multi-level marketing (MLM) companies and pyramid scheme operators, tells its own story.
The finance ministry has been silent about the exaggerated returns and fake claims by crypto exchanges and its issuers. This is happening with the tacit support and, perhaps, active participation of powerful politicians. The Reserve Bank of India (RBI) had signalled its discomfort over cryptos and banned banks from holding or facilitating these currencies. But this order has been set aside by the Supreme Court (SC).
Normally, the government would have moved quickly to bring in legislation to back RBI’s action. Not this time. Not even when crypto supporters are issuing full-page advertisements to say that Indians have already invested Rs6 lakh crore of crypto assets and they want a regulated investment environment. A crypto maker claims that the ‘market-cap’ of tokenised currency has touched the US$3-trillion mark on unregulated crypto exchanges flourishing in India, while a media report proclaims that 105 million Indians have invested in some form of digital currency.
Any move to regulate cryptos ought to be preceded by a clear stand on whether India wants to recognise tokenised currency, clarity on its safety and its backing (while paper currency is backed by the government’s promise to pay, cryptos have no such backing) and eligible issuers. Instead, under the global mania over crypto currency and its apparent adoption by several countries, India has chosen to remain silent. While countries, such as China and Singapore, initially supported it, they too seem to be having second thoughts.
Crypto investors must realise that regulation alone does not guarantee anything—least of all protection from losses. And, when things go wrong, looking to the judiciary for help is also futile.
Consider two of the most egregious examples of the past three decades. PACL or Pearls, a Ponzi scheme operating in India since 1997, which successfully gamed the system until 2016, raised nearly Rs50,000 crore in principal. In 2016, a committee was set up to supervise distribution of funds recovered from Nirmal Singh Bhangoo and family which ran PACL; but, by April 2021 only Rs438 crore was distributed to 1.27 million victims.
Then there is the Sahara Pariwar, which was allowed to raise over Rs1 lakh crore through four Ponzi-like cooperative societies that could spread their tentacles across India, even as the founder, Subrata Roy, was involved in a high-profile litigation with the Securities and Exchange Board of India (SEBI) in connection with two realty companies that had illegally raised funds without regulatory clearance. A path-breaking SC order in August 2012 led to Sahara pariwar depositing Rs15,500 crore with SEBI, which was to be returned to investors under supervision of a retired SC judge.
Nine years later, SEBI cannot find most of the investors, since they were forced to convert to other investments like deposits in the cooperative societies. So, SEBI is sitting on these massive funds, while Sahara has begun to default on payments since late-2019 (read Sahara Refunds: Did the SC Want SEBI To Sit on Rs15,448.67 Crore for a Decade?). Subrata Roy was jailed for two years for contempt of court and the trial remains caught up in the ‘tareek pe tareek’ process of endless new dates.
Depositors, who have been left high and dry, are holding protests across India; but, despite the involvement of Rs1 lakh crore, there isn’t enough political heat to set up a time-bound investigation. Most politicians across the political spectrum, having enjoyed Sahara’s largesse, get away with their silence.
While we sympathise with their plight, it is important to remember that every single depositor who is angry today had ignored all warnings and concerns leading to the incarceration of Subrata Roy and continued to deposit money with the organisation from 2012 (when SC issued a path-breaking order against Sahara) right until 2019. It is something that crypto investors may have to be reminded about in the future.
The fund-raising spree by collective investment schemes (CISs) 15 years ago holds another lesson for those who want to learn from the past. Names like MPS Greenery, Alchemist and Saradha were all controlled by politically powerful people, including members of parliament (MPs), and actively endorsed by film and sports stars. Do the similarities ring any alarm bells? Readers in their sixties and above may also recall Ponzi schemes masquerading as plantation companies in the mid-1990s, where people lost thousands of crores of rupees. Many poor and vulnerable people, who borrowed to reap quick returns, ended up repaying debt to local moneylenders for over a decade, in addition to losing the original investment.
Impressionable youngsters of today, who have no memory of previous scams, are lured into investing, thanks to speed of persuasive messaging through social media, because there is no regulation to protect them.
The Crypto Sales Pitch
Crypto exchanges claim that ‘the growth of crypto assets across the globe testifies’ to the growing excitement over ‘decentralised finance and non-fungible tokens and meme coins’. The pitch was probably the same during the tulip mania (of the 17th century), the South Sea bubble (18th century) and the dotcom bubble (at the turn of the 21st century); they all promised a new world and a new reality. In fact, anonymous decentralised tokens have been quickly adopted by organised crime and terrorist organisations, hardly making them the bright new hope of the future.
Inherent contradictions about crypto claims are ignored around the world as are experts who dare to speak out. In a series of tweets in July, Jackson Palmer, a data scientist and engagement marketing expert (@ummjackson) based in San Francisco, succinctly highlights all that is worrying about cryptos. He tweets: “After years of studying it, I believe that cryptocurrency is an inherently right-wing, hyper-capitalistic technology built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight and artificially enforced scarcity.” Further, he says, it takes “the worst parts of today's capitalist system (e.g., corruption, fraud, inequality) and uses software to technically limit the use of interventions (e.g., audits, regulation, taxation) which serve as protections or safety nets for the average person.”
And, contrary to claims of decentralisation, Palmer says, the crypto industry is controlled “by a powerful cartel of wealthy figures who with time, have evolved to incorporate many of the same institutions tied to the existing centralized financial system they supposedly set out to replace.” The last bit explains the push to legitimise and regulate cryptos even there is no clarity on risk and its mitigation.
While the crypto industry is pushing for ‘regulation’, some like Sudhir Mehta, of Pinnacle Industries and president of Mahratta Chamber of Commerce Industries & Agriculture, calls it ‘unregulated gambling’ that targets low-income groups with get-rich schemes. He says allowing self-regulation of cryptos will cost millions of Indians their livelihood. While cryptos are allowed to run amok, manufacturing continues to be shackled by over-regulation that includes inane but extortive laws like whitewashing of toilets (even if fully tiled)!
In fact, crypto bubbles and frauds have been surfacing with regularity. But these reports, usually in the form of social media posts and independent digital media publications, are drowned out by the marketing blitz and paid coverage orchestrated by the crypto industry. Clearly, cryptos are an unknown territory and any experimentation should be restricted to money you can afford to lose without whining. Let me end by quoting @ummjackson on the lop-sided discussion about cryptos “…these days even the most modest critique of cryptocurrency will draw smears from the powerful figures in control of the industry and the ire of retail investors who they’ve sold the false promise of one day being a fellow billionaire. Good-faith debate is near impossible.” I expect a similar hysterical and motivated response to this column as well.
When certain banks went belly up, did the government provide full guarantee for the money deposited with these banks? No and in which case the government can neither provide guarantee nor deny. This is a market game and wise should stay out and greedy will suffer. Alcohol and Tobacco are perils to the health and government is profited by levlying huge tax. The government should first reglulate the perks given to Babus, Judiciary, and elected and nominated (so called ) public representatives. Even today after 75 years our MPs MLA and their kith and kin enjoy shameless previlges unheard off. Let government abolish such perks and subsidies to the elite. Crypto is miniscule.
The Government has woken up very late. The Crypto is existing since 2008, though for few years not many people were aware, least of all, the Government and RBI. It was also not promoted with ads like today. As usual the sufferers will be the people who are swayed by what the early investors earned, exactly like the PONZI schemes. But it is never too late to stop legality of such schemes.
This is nothing but a digital ponzi scheme. These digital tokens do not have any intrinsic value and not backed by any physical asset. They are not amenable to any of the basic valuation principles. Prices are driven more by greed and speculation. Hope Government will act decisively to protect the gullible investors falling prey to the catch advertisements.
The way cryptos have spread is incredible. That itself is dangerous. But it is now too late. Next market crash may be triggered by crypto meltdown because people are borrowing like mad to invest in these coins. Such borrowings will surely lead to insane selling sooner or later. It will be 2008 x 10 or even worse. Kindly note many stalwarts had AAA rating just days before the collapse . Coins dont have even that.
Once crypto is regulated, there will be orchestrated muling of crypto. Mules that will be asked to buy to prop prices and sell to drop prices. Doing this can also be a full time vocation for many. As long as propping is regular, many will be convinced of valuation of ether due to regular exit points. The effect of ether on real economy can also debilitate.
With respect I would disagree:
a) Government backing is meaningless as government does not guarantee to protect value of currency.
b) Government does not guarantee that once a legal tender always a legal tender, as we have witnessed 86% of our currency demonetised.
c) USA has monopoly over reserve currency status for its USD. It can monopolise huge seigniorage at the cost of other countries and use the reserve status to blackmail or sanction any country in the world.
d) As described in your Bank Loot segment, banks too cannot guarantee protection of value of the hard-earned savings. Depositors get only negative real return on their deposits.
e) The amount appropriated by banks and other intermediaries in remittance on account of bid-ask spread and fee is huge.
f) Despite regulator and judiciary, there have been scams in markets of other asset classes. There is no evidence that the scams in cryptos are higher.
g) Market risk is not peculiar to cryptos. Other asset classes too suffer from that risk.
h) There is a need to overhaul regulatory and justice system for protecting interests of investors, but that does not we should impose outright ban.
i) Crypto space is yet to mature, but it holds promise to address the fundamental and structural flaws in the existing financial/monetary system. We cannot throw baby with the bath water.
Private cryptos have little future. However Govt-backed cryptos will surely be in circulation in the years ahead. It is amazing that some people believe that private cryptos-issued by unknown people from unknown locations- are sustainable . It seems to be even worse than the Tulip mania.
Thanks for detailed analysis and comments on crypto.I donot know about Modisaheb but we wl never touch this and vindicates my initial thoughts 2 yr ago that this is to be avoided like plague.
Wait for disaster. Always impossible to educate interested parties . Strange that it is claimed by those running crypto in their advertisements that in India more than 10 Crores owners of Cryptos ????. Hope Govt is watching for future crack down. Probably suits those who have unaccounted money or wants quick buck till crack down internationally like China.
Wait for disaster. Always impossible to educate interested parties . Strange that it is claimed by those running crypto in their advertisements that in India more than 10 Crores owners of Cryptos ????. Hope Govt is watching for future crack down. Probably suits those who have unaccounted money or wants quick buck till crack down internationally like China.
Tulip mania and dot com mania are simply not comparable.
Many companies survived and prospered after the bubble burst. Biggest example is Amazon which survived and today is one of most valuable companies in the world.
In the same way, a few cryptos will survive and remain active for a long time... bitcoin is already 13 years old.
Since 1947 the INR has lost 99.8% of its value as compared to gold. The figures would be similar when compared to other real assets.
"Backing" of the government is meaningless unless the underlying value is backed.
At least the govt is backed by the people and fiat currency will survive until people find a better alternative. Not a worse one like crypto. But who is behind crypto. If you read the basics itself about crypto, it\'s clear that even the most popular crypto such as Bitcoin could be controlled by a few (or even single) entities. I totally don\'t understand, how someone could see future in such thing...
This couldn't be further from the truth, its impossible for bitcoin to be controlled by just a few entities. It a network of millions of computers worldwide, and the only way to control the bitcoin network is to have more computational power than the rest of the network combined. Even the largest super computers cannot compete with the combined power of millions of computers worldwide.
And that sums up the problems in today's world, not just in crypto, but in all spheres of life - from relationships to sexuality to politics to religion, and everything in between.
Listening and constructive dialogue is a relic of the past.
Hatsoff for thought provoking info in crypto currencies with bit of historical failures of similar schemes. In all such schemes, the people at the top of pyramid (politicians, tax avoiders, pedlers, etc.) are the beneficiaries whereas the people at the bottom of pyramid the loser. Mind you, this crypto cyrrency is not backed by any Government or federal banks.
Anyone who would like to ignore the warning may do so at their own risk.
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30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
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a) Government backing is meaningless as government does not guarantee to protect value of currency.
b) Government does not guarantee that once a legal tender always a legal tender, as we have witnessed 86% of our currency demonetised.
c) USA has monopoly over reserve currency status for its USD. It can monopolise huge seigniorage at the cost of other countries and use the reserve status to blackmail or sanction any country in the world.
d) As described in your Bank Loot segment, banks too cannot guarantee protection of value of the hard-earned savings. Depositors get only negative real return on their deposits.
e) The amount appropriated by banks and other intermediaries in remittance on account of bid-ask spread and fee is huge.
f) Despite regulator and judiciary, there have been scams in markets of other asset classes. There is no evidence that the scams in cryptos are higher.
g) Market risk is not peculiar to cryptos. Other asset classes too suffer from that risk.
h) There is a need to overhaul regulatory and justice system for protecting interests of investors, but that does not we should impose outright ban.
i) Crypto space is yet to mature, but it holds promise to address the fundamental and structural flaws in the existing financial/monetary system. We cannot throw baby with the bath water.
Many companies survived and prospered after the bubble burst. Biggest example is Amazon which survived and today is one of most valuable companies in the world.
In the same way, a few cryptos will survive and remain active for a long time... bitcoin is already 13 years old.
Since 1947 the INR has lost 99.8% of its value as compared to gold. The figures would be similar when compared to other real assets.
"Backing" of the government is meaningless unless the underlying value is backed.
What does government's backing promise?
Actually nothing....
The guarantee of rupee is rupee itself. There is no guarantee of value.
If rupee was to be devalued 50% tomm, the government won't give people twice their money.
It is like a man going to a bank and when being asked for a guarantor, presenting himself as guarantor.
And that sums up the problems in today's world, not just in crypto, but in all spheres of life - from relationships to sexuality to politics to religion, and everything in between.
Listening and constructive dialogue is a relic of the past.
Good write up!
Anyone who would like to ignore the warning may do so at their own risk.