We must regulate newer forms of investing at the very earliest – Mint

In comparison, as of May, the total number of demat accounts for share trading in India stood at close to 60 million. Demat accounts have been around for close to a quarter of a century. Clearly, the number of crypto investors in India has risen by leaps and bounds.

This is helped by the fact that crypto exchanges are financed by a huge amount of venture capital investment, allowing them to massively advertise the ease with which such investment can be carried out digitally. The Tokyo Olympics coverage, the World Test Cricket Championship and the India-England Test Series, which is currently underway, have had a large number of such advertisements.

While almost all these advertisements talk about the ease of investment and the fact that money could be made sitting at home, none of them do enough to explain the financial risk involved. Their disclaimers, if any, are either in extremely small fonts barely visible to the human eye or scarcely audible in a two-second sound bite at the end of their advertisements.

Cryptocurrency prices move up and down rapidly, making them a very risky form of investing. When an investor makes money, it might seem very easy, but that money can be lost as quickly as it has been made. Cryptocurrency ads don’t do much to explain this risk.

And not just cryptocurrencies, the rise of the digital medium has thrown up all kinds of other investment opportunities. Retail investors can now trade foreign exchange at home. Those who understand foreign exchange would know that the value of currencies moves very little against that of others on any given day. The only way an investor can drive up returns is by leveraging the investment. While leverage pushes up returns, it can also lead to bigger losses if the trade goes against the investor. Such intricacies are unknown to retail investors who are jumping on to such new vehicles for the first time.

Further, money can be made online by playing card games like rummy as well. In fact, many such online card games are advertised by out-of-work film and TV actors. Then there are many websites which operate on the borderline of being games of skill or chance (and thus gambling platforms). Many cricketers advertise such games.

There is also the case of stock market influencers who recommend specific stocks and initial public offers (IPOs) on their YouTube channels. They have deals signed up with stock brokerages, in some cases even with brokerages that claim not to advertise, and aren’t always clear about whether the influence they exercise is paid for by an advertiser. In fact, if such influencers were to declare upfront that they are being paid to make a specific recommendation, their business model would probably collapse.

The point here is that the rise of cheap smartphone-enabled internet access, combined with the work-from- home dynamic of the covid pandemic, has led to a massive increase in what could be categorized as new forms of investing, especially at the retail level. It has also led to an increase in the financial risk that these investors are taking on. This wouldn’t have been a problem if investors knew what they are getting into, but most don’t.

As Richard Thaler and Cass Sunstein write in Nudge: The Final Edition: “Much of the time, more money can be made by catering to human frailties than by helping people to avoid them…Markets provide strong incentives for firms to cater to the demands of consumers, and firms will compete to meet those demands, whether or not those demands represent the wisest choices.” This is precisely what companies offering these newer forms of investing are doing.

Typically, one would expect them to self-regulate and offer adequate disclosures while advertising, thereby putting out messages the appropriate way. But as many financial crises over the years tell us, self-regulation and the financial services industry rarely go together. This is why financial services remain heavily regulated.

When it comes to these newer forms of investing, Indian regulators like the Reserve Bank of India and Securities and Exchange Board of India have clearly been caught napping. One reason for this is the fact that these newer forms are primarily in the digital domain, which operates 24/7, and hence policing it is difficult.

Given that the first generation of kids who have been using smartphones for at least a decade are now turning into adults, and knowing their facility with technology, they will be more inclined to invest in these newer options than go the traditional way. Hence, it’s important that Indian regulators start putting rules in place, starting with an insistence on adequate disclosure of risk when such firms advertise.

At least the cryptocurrency bill is reportedly ready and awaiting the Union cabinet’s approval.

Vivek Kaul is the author of ‘Bad Money’.