RBI Reiterates Crypto Threat, Says It Undermines Financial Stability

The Reserve Bank of India (RBI) has reiterated its stance that cryptocurrencies undermine India’s financial and macroeconomic stability.

In a concept note on central bank digital currency (CBDC), released on Friday, the central bank cited the ‘negative consequences’ of cryptocurrencies for the financial sector. It said that a wider proliferation of cryptocurrencies has the potential to diminish the regulatory powers of Indian financial authorities. 

“These digital assets (cryptocurrencies) undermine India’s financial and macroeconomic stability because of their negative consequences for the financial sector…Further, a wider proliferation of cryptocurrencies has the potential to diminish monetary authorities’ potential to determine and regulate monetary policy and the monetary system of the country which could pose (a) serious challenge to the stability of the financial system of the country,” said the RBI.

The RBI said that the inherent design of cryptocurrencies is geared towards bypassing the established and regulated intermediation and control arrangements that play a crucial role in ensuring integrity and stability of the monetary and financial ecosystem

In the note, the central bank also pointed out risks related to money laundering and financing of terrorism. It said that increased usage of cryptocurrencies can ‘adversely’ affect the enforcement of foreign exchange regulations and undermine the stability of the domestic currency. 

“..the unabated use of crypto assets can be a threat to the monetary policy objectives as it may lead to creation of a parallel economy and will likely undermine the monetary policy transmission and stability of the domestic currency. It will also adversely affect the enforcement of foreign exchange regulations, especially, the circumvention of capital flow measures,” it added.

The central bank is staunchly opposed to private cryptocurrencies. Earlier this year, Finance Minister Nirmala Sitharaman told the Parliament that the RBI had suggested prohibiting cryptocurrencies in the country.

One of the reasons for the RBI looking at launching CBDC is to wean people away from using private virtual currencies and provide them alternative digital currency controlled by the central bank. 

In the concept note, the RBI stated that CBDC will be designed with in-built mechanisms for anti-money laundering and combating financing of terrorism. Under the prospective CBDC regime, the identity of the CBDC users will have to be verified with ‘some authority or institution’ to validate the legitimacy of such transactions.

Interestingly, the central bank said that the commercial banks are best placed to conduct such checks under the current model. 

The RBI also said that it would soon begin the pilot launch of the digital rupee. 

Financial Implications Of CBDC

One of the major takeaways from the concept note was that the RBI will adopt a three-tier approach towards designing CBDC. These include non-interference with public policy objectives, complementing existing forms of money, and promoting innovation to increase the overall efficiency of the payment system. 

Highlighting pitfalls related to CBDCs, the RBI also noted that digital currencies can affect existing financial market structures and business models. The concept note added that CBDCs may pose risks to financial stability during its evolution, ‘particularly via the potential disintermediation of banks’.

Disintermediation refers to the removal of intermediaries from a supply chain, which in this case are the banks. 

Elaborating further, the central bank noted that the said financial disintermediation can lead banks to rely on more expensive and less stable sources of funding. Citing various studies, the RBI underscored the point that CBDCs can likely weigh heavily on profitability of banks and subsequent lending by them. 

Adding that CBDCs can ‘hypothetically’ trigger faster bank runs in terms of financial crisis, the RBI said that the issues can be addressed via appropriate limits on CBDC holdings and transactions.

Commenting on the concept note and CBDC, social crypto trading platform Tarality’s CEO and founder Abhijit Shukla said, “A more reliable, effective, dependable, controlled, and legal tender-based payment option might also result from CBDCs. The possible benefits must be carefully weighed against the related hazards.”

The concept note also called for further reforms in the monetary laws of the country. It said that there is a need for changes in matters such as the right of issuance of CBDC, its legal tender status, among others.

Industry Reacts

Crypto entrepreneurs Inc42 spoke to expressed their confidence in the prospective CBDC.

“After the invention of UPI, this is the most significant event that could occur in the Indian fintech industry. This will facilitate the development of enterprise-level use cases. It will also pique the interest of major investors in the Indian blockchain ecosystem,” crypto fintech platform MuffinPay’s CEO and founder Dileep Seinberg said.

Echoing the RBI’s sentiments, virtual reality platform P2E Pro’s founder Tapan Sangal said, “Crypto can never be a legit currency. Whatever value it might hold at the present comes from the various pump and dump schemes of the crypto stakeholders and that affects India’s financial stability negatively. Therefore, CBDC as a true digital currency is what we believe in and not cryptocurrency.”