Six reasons why India’s central bank believes cryptocurrencies threaten financial stability

December 31, 2021

The Reserve Bank of India states that private cryptocurrencies pose a threat to financial stability.

It highlighted that these virtual assets pose a threat to customer protection, anti-money laundering efforts, and to the flow of capital at large.

Here are six reasons why India’s central bank thinks cryptocurrencies are a bad idea.

India’s central bank, the Reserve Bank of India (RBI), has made no secret of the fact that it isn’t a fan of cryptocurrencies — a stance that many central banks around the world have taken as well.
In its December Financial Stability Report (FSR) the apex financial institution highlighted its concerns yet again. And, this time, it spelled out six reasons why cryptocurrencies pose a threat to India’s financial stability. One of the bank’s primary concerns is the rise of decentralised finance (DeFi).

Here’s a quick look at why the RBI continues to remain anti-crypto:

1. Customer protection

The hype around the high returns from cryptocurrencies has led to more fraudulent ‘get-rich-quick’ schemes lurking in the dark corners of the market. According to industry estimates, India is home to around 15 million investors. And, these investors don’t have any laws to back them up.

India’s crypto bill is still a work in progress, which means that if a large chunk of investors lose their money — they will be left with no recourse within the current legal framework of the country. Even the Securities and Exchange Board of India ( SEBI) told mutual funds to hold off on sending any new fund offerings based on crypto assets until India’s crypto laws are in place.

2. Anti-money laundering and combating the terror financing

Cryptocurrencies, especially Bitcoin in this case, were created as a way to take the power of monetary control away from centralised authorities — like the government and the central bank. So, it’s no surprise that the central bank takes issue with not being in control.

According to the RBI, cryptocurrencies have led to an increase in assets that can transfer funds with increased anonymity. There are virtual assets that focus on privacy — think Monero, Zcash and others. Decentralised platforms pose the problem of having no single entity to go after, if and when, things go wrong. Privacy wallets and other new financial instruments allow for reduced transparency, which, in turn, obscures the flow of finance.

“There’s also a national security angle over here now, there are folks from intelligence who are involved,” Aritra Sarkhel, the head of governance issues and policy at WazirX, told Business Insider during an interview earlier this month.

3. Cryptocurrencies are prone to fraud

As things stand, anyone can launch a new cryptocurrency. There is no national framework defining what a cryptocurrency is, or the minimum requirements for it to be a legitimate investment option.

This means that anyone can create a virtual asset, get others to invest in it to hike the price, and then cash out their stake without having to explain why. This is normally what is called a ‘rug-pull’. After the ‘founders’ or ‘influencers’ pull out their money, other investors are left holding less than what they originally started with.

4. Prone to extreme price volatility

The crypto market is speculative and during the COVID-19 pandemic it saw values surge to new all-time-highs. And, while the worst seems to be behind us, the RBI believes that the risk of sharp corrections still remains.
Just as Bitcoin was able to hit nearly $70,000 last month, it’s possible that it could sink lower than $45,000 — the lowest price the cryptocurrency has seen since then.

5. Capital flow management

Just as Bitcoin was able to hit nearly $70,000 last month, it’s possible that it could sink lower than $45,000 — the lowest price the cryptocurrency has seen since then.

According to the RBI, a country like India, which is subject to capital control, is especially vulnerable to destabilizing effects of cryptocurrencies. “Free accessibility of crypto assets to residents can undermine their [emerging market economies] capital regulation framework.” it said.

6. Impact on monetary policy

Non-bank actors — by which the RBI means crypto exchanges and other blockchain companies offering financial services — are adding to India’s dollar funding stresses by using loopholes in the traditional policy approach to foreign exchange markets, according to the central bank.

“At this stage, it is important to better understand non-bank investors’ role in creating or propagating systemic risk so that policy actions can be taken to smooth out financial risk-taking over time,” said the RBI’s report.

Source: Business Insider

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