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British Legacy of Reserve Bank of India

The Reserve Bank of India was in news recently for behind the scenes attempts to influence the ban on cryptocurrencies in India and lobbying for criminal punishment of cryptocurrency holders. They launched a dirty whisper campaign in Indian newspapers by selectively leaking quotes from unnamed senior officials claiming an imminent ban on cryptocurrencies, throwing the nascent industry into a state of despondency. The matter culminated when an article appeared in Reuters, quoting an unknown senior official--supposedly in the know-warning of instant and immediate ban with imprisonment for crypto holders. This contradicted a statement given by the Finance Minister, Nirmala Sitharaman in the India Today conclave just a day before about keeping a window of innovation open. The Reuters article was then relayed by all major news outlets in India without any further verification or cross-checks. The previous attempts by The Reserve Bank of India to impose a shadowban on cryptocurrencies did not survive legal scrutiny by the Supreme Court of India and now it is apparent that even the Finance Ministry is publicly moving away from attempting to completely ban cryptocurrencies. In light of the public display of clash of institutions, the role of The Reserve Bank of India has to be scrutinized deeply and public debate is needed to determine whether Indian people will benefit from its continued existence, or whether its position is to oppose innovation. The dystopian behavior of the Reserve Bank of India, can be traced to the British origins of the Institution. Let's dwell on how British Institutions operated in India. They were uniformly characterized by poor representation of the Indian perspective, they were working for narrow self-interests often contrary to those of the general Indian population. They used threats and imprisonments to fasten their dominance, when half attempts of persuasion failed. Reserve Bank of India was created as a private bank in 1935, as a result of the Hilton Young Commission report, which was submitted to His Majesty's Government in 1926. The commission was formed after botched attempts of the Babington Smith Committee to transition Imperial India away from the silver standard to the gold standard failed. By 1929, the Great Depression struck leading to a rapid exodus of both gold and silver. So, the 1926 report eradicated and rapidly executed in 1935 to create an institution that will ensure that Imperial Government debts can double up as currency, obviating the need to keep gold and silver. A light reading of the Hilton Young Commission report, clues of the background-position of India in 1926. Paragraph 20 for instance: "India is perhaps the only country, among the great trading countries of the world, in which the Government exercises direct control over currency in general and over the note issue in particular." India was then, one of the great trading nations of the world, partly because of its infinite potential to convert the Indian rupee into silver and vice versa, freely. Reserve Bank of India was nationalized in 1949 and transformed from a private bank with independent shareholders managing currency and reserve functions of the Government of India to a dreaded government bureaucracy that imposed the tightest currency controls on the people of India, a legacy which is haunting us till now. From about 10 percent share in global trade in 1935 since its formation, the currency controls supervised by the Reserve Bank of India have overseen the share fall to less than 3 percent in 2021.

Role in Draconian Foreign Exchange controls

The Reserve Bank of India after independence has presided over a brutal exchange control regime which has seen numerous arrests and stifling paperwork for any transaction involving foreign exchange as late as 1998. An Indian who goes to work in the Middle-East can freely transfer the fruits of his labor to any country including India. The moment he landed back in India in the 1980s, if he tried to do the same, he would be arrested for violating Foreign Exchange Regulation Act 1973. At a time when foreigners were creating international companies like Sony, Toshiba, IBM, Citibank, and Coca Cola with full freedom of foreign exchange conversions, Indian entrepreneurs under auspices of the Reserve Bank of India were being harassed and imprisoned if any of their products needed foreign inputs. Even after currency reforms in 1999, the Reserve Bank of India prevented Indians from investing freely in foreign stocks, whereas foreign nationals under full freedom of their domestic foreign exchange laws could invest freely in Indian stocks. Indian ownership of foreign stock markets is almost close to zero. Whereas foreign ownership of Indian publicly traded stocks is more than 20 percent. Which decent society gives preferential treatment to foreigners, and creates insurmountable barriers for its nationals? It's the same pattern continuing in Cryptocurrencies. Foreigners have accumulated more than 1.7 trillion USD in net wealth through Cryptocurrencies from 2009 to 2021. Whereas for Indians, the Reserve Bank of India is still applying the FERA mindset to deny them those rights. It is autocratic how Indian ownership and participation in this greatest wealth creation phenomenon in the 21st century is minimal. Cryptocurrencies offer India a promise of a complete new start. The country in a single shot can get rid of all bureaucracy, move beyond the taints of oppressive regulatory regimes, and transmute Indian entrepreneurs straight away into financial freedom that Indians truly deserved after independence but has been denied. This is a millennium opportunity that cannot be lost. This is our generational opportunity to take back economic leadership of the world which we once had.

A bureaucracy gone astray

India has a chain of command where "We the people of India" sit at the apex of the pyramid. It's not the President of India who is at the top. It is the people of India. The Prime Minister of India is not the King of India. He is not the ruler of India rather the servant of the people of India. The government of India exists to serve the interests of the people of India. When fundamental new innovations like cryptocurrencies emerge, then it is not important whether the government loses taxes or not. It is not important whether some people are doing economic transactions outside the government control structure or not. The first order of precedence is whether the innovation is improving the lives of the people. If the innovation is beneficial to the economic well-being of the people directly, even at the cost of government finances, the interests of the common people will overrule the interests of the government. In a democracy, tools and techniques of governance can change. If a choice needs to be made between the interests of the government and the interests of the people, then the interests of the people will override. A government bureaucracy on its own cannot subvert that process. If the Finance Minister makes a public statement assuring the people of India that a calibrated approach will be taken for a critical innovation, government bureaucrats cannot act through unauthorized media leaks to undermine that position. And they definitely cannot indulge in scaremongering through newspapers as it is unauthorized and unapproved behavior. If they have an opinion, they should come out with a white paper, explain their stance, and put it in front of the court of people. Reserve Bank of India officials has shown scant respect for public discourse in the matter of cryptocurrencies. They have never explained their stance properly. The response to previous Right to Information petitions has been pathetic. They have delayed responses to the Supreme Court as long as they could. The decision whether to embrace cryptocurrencies or to ban them, lies with the people of India directly. And, that decision will be made after all dimensions of these innovations are understood. If the innovation makes the entire present currency control structure irrelevant, it's for the people of India to take a final call on it. Reserve Bank of India or its officials cannot pre-empt that process by applying duress.

Indian banking sector needing continuous taxpayer support

The Hilton Young commission in its 1926 report felt that any institution that needs to control currency of the country, also needs to control the credit quality of the country to effectively ensure currency stability. Hence, the Reserve Bank of India was given additional responsibility to supervise the banking sector in India. Over 85 years of being steward of banking under the Reserve Bank of India supervision, India does not have a single bank in top 30 banks of the world in terms of asset size and quality whereas Great Britain, which has an economy of size comparable to India, has 4 banks in the top 30. Even smaller economies like Canada and Spain have world-class banks in the top 30 list. In 1935, Imperial Bank of India (now known as State Bank of India) was one of the best banks in the world. After being supervised by the Reserve Bank of India for over 85 years, it has been reduced to a struggling bank necessitating periodic public cash infusion. India has the lowest percentage of population among which banking is the top 10 economies of the world. Almost all banks in India have issued poor quality loans consistently to contentious businesses and every dozen years, Indian banks are required to be rescued by Indian taxpayers. None of Reserve Bank of India officials have been incarcerated for a host of banking failure and corruption cases. Although, countless ordinary Indian businessmen have been harassed and imprisoned for non-payment of loans which the Reserve Bank of India should not have allowed to be disbursed at the first place. Isn't it ironic that the Reserve Bank of India is asking for a 10-year prison sentence for ordinary people just for putting their honest and hard-earned money into cryptocurrencies. Nevertheless, the officials went scot-free for numerous banking scams in India over decades, often with criminal negligence on behalf of Reserve Bank of India officials. It just seems that the Reserve Bank of India has two different standards for judgement. One standard where its officers can never be touched or arrested no matter the magnitude of banking crimes often possessed by themselves. Another standard, where it is acceptable to arrest Indian people for honestly seeking economic betterment. With that history of banking performance, the Reserve Bank of India should not be permitted to deprive Indian people of world-class banking when innovations are emerging in the form of cryptocurrencies. The old rotten structure should not be allowed to taint the bright future.

No innovation in Indian banking sector

In an advanced economy, the Reserve Bank of India is probably the only central bank that decides how many branches a bank can open and what ATMs can do. It also decides whether SMS is required to be sent after a transaction. Small operational decisions like what products to offer, what rates to offer, which usually should be performed inside the bank, all must be approved by the Reserve Bank of India. To grow innovation, creative destruction is an essential condition. Newer forms of banking must emerge in marketplaces freely and offer better and efficient services challenging the incumbent. Thus, newer and multiple choices are offered to customers that would force the incumbent to make rapid changes in response. If the incumbent is too slow and becomes fossilized, it must fail. If failure is not permitted, then the system freezes, and innovation stops. The Western World sees massive innovations in the banking sector driven by common people like independent third-party ATMs in stores and petrol stations, pure online banks, narrow functional banks, and the multitude of credit and investment products, none of which go to the Central Bank for approval. In India, if Times Group launches an innocuous international money transfer service using Bollywood actor, Amitabh Bachchan as a brand ambassador, it gets shut down instantly by the RBI. With a past record of being an agency actively opposing innovation Reserve Bank of India asphyxiates innovation due to a lack of other oxygen Experimentation Space. Our entrepreneurs should be making consistent innovations and newer experiments, challenging the status quo all the time. But the dark monster in the room called the Reserve Bank of India will never allow it, as two young entrepreneurs in Bangalore found out after being thrown into prison for creating a cash dispensing machine for their own customers. How can the soul of society even tolerate the consideration of a prison sentence for entrepreneurs wanting to improve customer/consumer experience? It is anything but fair that entrepreneurs of India go to prison for innovation in the blink of an eye, when western entrepreneurs can bump even the sitting President of their country, off their platform. It takes no genius to recognize that if bureaucrats are put in charge of innovation, we get neither innovation nor stability. As, is evident by the decay of the banking sector in the peak years of Indian economic growth. From 2000 to 2020, when the Indian Economy was making ravishing strides, our banks were getting saddled with bad debts almost to the point of extinction unless taxpayer's money bailed them out. How ironic? To reclaim the innovative spirit of Indian society in the banking sector, the Reserve Bank of India has to step back. We are a culture that has been provided leading innovation for centuries, and even now our people run the largest corporations in the world with a finesse that is unrivaled. Our nationalization experiment has failed. Our 1935 Central Bank experiment has failed. It is time to recognize the obvious. India needs to rediscover the inner spirit in the banking and finance sector. We need to rejuvenate our souls. We need ordinary people to be empowered by freedoms that can permit creative destruction and experimentation space without fear or favor. If a choice needs to be made between the Reserve Bank of India and Cryptocurrencies, the decision is very obvious.

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