RBI Calls Crypto a Threat to Financial Stability in June FSR

The Reserve Bank of India (RBI) has reiterated its warnings that cryptocurrencies pose a threat to financial stability in the Financial Stability Report (FSR) for June 2022.

In his foreword to the report, RBI Governor Shaktikanta Das said cryptocurrencies pose a clear danger. “Anything that derives value on the basis of pretending, without any underlying value, is just speculation under a sophisticated name. While technology has supported the reach of the financial sector and its benefits must be fully exploited, the potential to disrupt financial stability must be guarded against,” he said.

As the financial system becomes increasingly digital, cyber risks are increasing and need special attention, Das added. This is one of the warnings that RBI officials have issued against the risks crypto-assets pose to the financial system.

The FSR noted that crypto-assets’ risks to financial stability currently appear limited, totaling only 0.4% of global financial assets and limiting their interconnectedness with the traditional financial system. However, the associated risks are likely to increase as these assets and the ecosystem supporting their growth evolve.

Currently, the market cap of a total of 19,920 cryptocurrencies traded on 528 exchanges is $908.7 billion, with Bitcoin accounting for 44% of this market cap. The top two cryptocurrencies account for 59%, while the top five accounts for more than three-quarters, according to the FSR.

The risks of stablecoins claiming to maintain a stable value against existing fiat currencies require particularly close scrutiny, according to the report. These are similar to money market funds and face similar redemption risks and investor runs, as they are backed by assets that can lose value or become illiquid in times of market stress.

Historically, private currencies have led to instability over time, and in the current context they lead to “dollarization” as they create parallel currency systems, the FSR said. Such parallel systems can undermine sovereign control over the money supply, interest rates and macroeconomic stability. For emerging economies, cryptocurrencies can erode capital account regulations, which can weaken exchange rate management.

In addition, cryptocurrencies can lead to disintermediation of the formal financial system, affecting financial stability, the RBI said.

While the extent of cryptoization seems limited so far, its growth bypasses restrictions on exchange rates and capital controls and limits the effectiveness of domestic monetary policy transmission, posing a threat to monetary sovereignty, the RBI said. Problems with these assets, such as price crashes, could spill over into payment systems and negatively impact real economic activity.

“It is in this context that central banks in both AEs (advanced economies) and EMEs (emerging market economies) are increasingly involved in projects related to CBDCs (central bank digital currencies) – digital money denominated in national currencies. unit of account and is an obligation of the central bank,” according to the FSR. The government and the RBI have previously said India will roll out a digital rupee in FY23.

Leave a Reply

Your email address will not be published. Required fields are marked *