Chief Economic Adviser (CEA) V Anantha Nageswaran stressed on Thursday that cryptocurrencies have yet to pass the rigorous tests desired to be on par with fiat currency and that this is a a “regulatory arbitrage”, rather than a financial innovation.

Speaking at an event in Assocham, the CEA said cryptos cannot match the basic tenets of fiat money – the latter has a store of value and widespread acceptability, and is a unit of account.

The CEA’s remarks and recent comments from senior finance ministry officials are seen as precursors to the government’s toughening stance as it puts the finishing touches to a consultation paper on cryptos.

Commenting on Decentralized Finance (DeFI), Nageswaran said, “In my view, although it is considered an innovation, I would reserve judgment as to whether it is truly innovative or truly disruptive in a positive sense, or is- that something we will end up regretting.”

“Much of what happens in the crypto or decentralized finance space – and I completely agree with what T Rabi Sankar, Deputy Governor of the Reserve Bank of India (RBI) said – for the Right now they seem like a case of regulatory arbitrage rather than a case of real financial innovation in my view,” the CEA said.

For these reasons, the CEA said it may not be very enthusiastic about cryptos “because sometimes we are not fully aware or do not understand the type of forces that we ourselves are unleashing”. “So I would be somewhat cautious in my welcoming of some of these FinTech-based disruptions like DeFI, crypto, etc.,” Nageswaran said.

Last week, Economic Affairs Secretary Ajay Seth said that India will soon finalize the consultation paper on cryptos with inputs from various stakeholders and even multilateral institutions such as the World Bank and the Monetary Fund. international (IMF). Stressing the need to strengthen a global strategy, the secretary said that “countries that have banned these digital assets cannot succeed” unless there is a global consensus on their regulation, as these operate in the virtual world.

The government intended to introduce the Cryptocurrency and Official Digital Currency Regulation Bill during the winter session of Parliament last year, but then decided against it. The bill had sought to “prohibit all private cryptocurrencies”, although it was to allow certain exceptions to promote the underlying cryptocurrency technology and its uses.

Subsequently, following the budget announcement to tax profits made on virtual digital asset transactions at 30%, some analysts claimed that the move legalized cryptos. To avoid such speculation, Finance Minister Nirmala Sitharaman had to repeatedly stress that it was the “sovereign right” of the government to tax such transactions and that the budget decision neither legalized nor banned cryptos.

“I’m not going to legalize it or ban it at this point. (A decision on) banning or not banning will come later, after consultations,” she told the Rajya Sabha in February. Subsequently, the government held consultations and is ready to publish a document soon. For its part, the RBI has come out in favor of a ban on private cryptos, saying they threaten a country’s financial sovereignty.

The Department of Finance is expected to define virtual digital assets, including non-fungible tokens (NFTs), for tax purposes soon. Some analysts have already pointed out the need to differentiate NFTs that digitally represent real or virtual assets from cryptocurrencies that lack an underlying asset. Taxing NFTs at 30% on par with cryptocurrencies could kill the fledgling industry, they said.