As India continues to debate the appropriate framework for cryptocurrency regulation, the country’s central bank has reiterated why digital assets pose a risk to the financial system.
The institution acknowledged that cryptocurrencies have grown in popularity, but stressed that digital assets cannot be classified as currencies or financial assets while emphasizing that they have no intrinsic value, the institution said. Reserve Bank of India in its June 2022 report. Financial stability Report published on June 30.
In the report, the RBI warned that private cryptocurrencies could erode the monetary control of the country, mainly due to the dollarization of most assets.
The bank also noted that the risks associated with cryptocurrencies could continue to skyrocket as the ecosystem evolves. Specifically, the RBI stated that the gains in capital account regulation of developing countries are threatened by cryptocurrencies, resulting in financial stability.
“Cryptocurrencies are not currencies because they have no issuer, they are not a debt instrument or financial asset, and they have no intrinsic value. At the same time, cryptocurrencies pose risks,” the RBI said.
The bank added:
“Historically, private currencies have caused instability over time and in the current environment result in ‘dollarization’ as they create one or more parallel monetary systems, which can undermine sovereign control over the money supply, interest rates and macroeconomic stability.”
Some identified risks relate to a lack of support for assets like Bitcoin and decentralized finance (DeFi). Additionally, the RBI sees the correlation of crypto markets with equities as another significant risk.
Therefore, the RBI argued that the growth of cryptocurrencies needs urgent regulation by countries. According to the bank, policymakers intending to regulate cryptocurrencies should focus on challenges related to cyber risk and climate-related financial risks.
RBI’s skeptical approach to crypto
The report complements the RBI’s previous skeptical approach to digital currencies, saying they pose a threat to the country’s financial sector. As Finbold reported, RBI officials warned that with most dollar-denominated cryptocurrencies, this could lead to the dollarization of the country’s economy.
To prevent the penetration of private cryptocurrencies, the RBI noted that it is exploring the possibility of rolling out a central bank digital currency (CBDC). With different countries researching CBDCs, the RBI recommended that each nation work out its risk mitigation when designing digital currency.