Cryptocurrency In India: RBI’s Ex-Guv Subbarao Explains Why RBI Is Worried About Cryptocurrency
The crypto industry thinks the central bank looks at cryptocurrencies through a narrow lens and doesn’t appreciate the different use cases of these virtual currencies. The industry’s argument is that cryptocurrencies are a digital asset and not a threat to the monetary sovereignty of the rupee.
While concerns that cryptocurrencies may facilitate money laundering and terrorist financing are expressed globally, RBI, for its part, has refrained from explaining its main concerns in detail, leaving the crypto industry is scratching its head.
In an interview with ETMarkets.com, former RBI Governor Dr D Subbarao said that RBI’s concerns about cryptocurrencies like Bitcoin are threefold.
The RBI is the sole currency manager in the economy and is responsible for the maintenance of the monetary system. Subbarao believes that if virtual currencies gain ground, it could threaten monetary stability, because “it is quite possible that the formation of national prices is fixed in this virtual currency”.
For Subbarao, the threat to the financial stability of the Indian economy from cryptocurrencies like Bitcoin is simple. “If regulated institutions, banks for example, are exposed to virtual currencies and if that currency is very volatile, then there could be financial instability,” Subbarao said.
The former finance secretary believes the threat to financial stability is particularly significant due to virtual currencies that have no intrinsic value and are supported only by algorithms, like Bitcoin and Ethereum.
Interestingly, Subbarao sees virtual currencies such as Bitcoin as a threat to the stability of India’s external sector. “Cryptocurrencies could become a vector of capital flight, especially in a country like India where there is still no full convertibility of capital,” said the former governor.
With this in mind, Subbarao views the efforts of central banks to create their own central bank digital currencies (CBDCs) as a defensive mechanism. A central bank digital currency is a virtual version of the country’s sovereign currency and is issued by the central bank. This is different from private cryptocurrencies like Bitcoin, which are issued by private citizens.
Subbarao, who led the central bank during the global financial crisis as well as the infamous 2013-14 “tantrum typing” period, believes Facebook’s plans to launch a stablecoin in 2016 (Libra) were the turning point. when central banks saw cryptocurrencies as an attack on their sovereignty.
The former governor, who currently resides in Singapore, believes that RBI’s main motivation for launching a central bank digital currency is to not be left behind. “The main motivation is to make sure that she is not left behind in a world where CBDCs could become very ubiquitous,” said Subbarao.
CBDCs could also help the central bank reduce the high costs it incurs for printing and maintaining currency in circulation. However, in an economy where payment systems have already become very penetrating and virtual wallets are multiplying every minute, Subbarao sees little incentive for individuals to move away from private cryptocurrencies.