The Reserve Bank of India offered a scathing assessment of cryptocurrencies in its latest financial stability report – saying the risks they create demand attention before they undermine established institutions.
“Cryptocurrencies are a clear danger,” the report bluntly states in its foreword, authored by Reserve Bank Governor Shaktikanta Das. “Anything that derives its value from a pretense, without any underlying element [value]is just speculation under a fancy name.”
The report does not rate cryptocurrency as an immediate danger, noting that crypto assets represent only 0.4% of all financial assets and their interoperability with the traditional financial system is “restricted”.
But the Bank sees trouble on the horizon.
“The associated risks are, however, likely to grow as these assets and the ecosystem that supports their growth evolve,” the report said. “The risks associated with stablecoins that claim to maintain a stable value against existing fiat currencies require close monitoring, in particular – they are akin to money market funds and face redemption risks and currency leaks. ‘similar investors because they are backed by assets that can lose value or become illiquid in times of market stress.’
Another concern is that cryptocurrencies “are designed to circumvent the financial system and all of its controls, including Anti-Money Laundering (AML)/Anti-Financial Terrorism (CFT) and Know Your Customer (KYC) regulations. )”.
The report also notes that, historically, private currencies have not ended well.
“They create parallel monetary systems, which can undermine sovereign control over money supply, interest rates, and macroeconomic stability,” the report asserts, adding “For developing economies, cryptocurrencies can erode regulation capital accounts, which can weaken exchange rate management.”
The report also warns that FinTech companies pose various risks and that powerful and cashed-in technology companies can make matters worse.
“BigTechs can grow rapidly and pose a risk to financial stability, which can result from increased disintermediation of incumbent institutions,” the paper asserts.
“Additionally, the complex intertwined operational linkages between BigTech companies and financial institutions could lead to concentration and contagion risks and issues related to potential anti-competitive behavior.”
BigTech can grow rapidly and pose a risk to financial stability
The paper also assesses Central Bank Digital Currencies (CBDCs) and notes that while they will be considered a digital alternative to cash and individuals may have stored currency balances, the current thinking is that these deposits are n will not attract interest payments. This is concerning, the report says, because moving money from banks to government-run CBDC wallets “could potentially reduce credit availability or increase credit costs.”
India is planning its own CBDC and wants it to become the heart of a global digital payment system. The nation has also introduced a hefty 30% tax on cryptocurrency income – a double rate of the national capital gains tax – and taxes crypto transactions at 1% of the value.
The Reserve Bank’s report comes on the heels of Chinese state-sponsored blockchain boosters calling the cryptocurrency a Ponzi scheme, and Singaporean authorities are warning crypto cowboys they will be kicked out of town if they misbehave. ®
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