🌎 India’s RBI Warns of Cryptocurrency Risks

Cryptocurrencies Pose Risks to Financial Stability, Warns Reserve Bank of India

The Reserve Bank of India (RBI) has reiterated its concerns over the risks associated with cryptocurrencies, including stablecoins, to financial stability in its Financial Stability Report for 2024.

Risks of Unchecked Cryptocurrency Adoption

According to the RBI, unchecked use of digital assets could lead to a loosening of monetary reins, open backdoors for capital flight, and divert resources available for financing the real economy. The regulator also raised concerns about the potential risks of stablecoins, including potential run risks.

Although the crypto market in India remains small, the narrowing gap between decentralized and traditional finance could pose systemic risks. Stablecoins, in particular, carry the added danger of significant holders of mainstream financial assets, such as government securities and other collateral, raising concerns about their impact on economic stability.

Unique Challenges of Stablecoins in Emerging Markets

Stablecoins pose unique challenges, particularly in emerging markets where country-specific macroeconomic and demographic factors have led to increased usage. These developments can undermine the effectiveness of monetary policy, circumvent capital controls, strain fiscal resources, and threaten financial stability.

“These developments can undermine the effectiveness of monetary policy, circumvent capital controls, strain fiscal resources, and threaten financial stability.”

Alternatives to Stablecoins and Regulatory Concerns

Over the years, the RBI has pushed for central bank digital currencies as a more reliable alternative to stablecoins. The RBI governor has labeled stablecoins as private money, which could undermine government sovereignty by allowing private issuers to dominate the payments market.

The RBI is also concerned about the potential risks of tokenization, including liquidity and maturity mismatches, excessive borrowing or debt built on tokenized assets, asset price and quality risks, and operational fragilities.

Regulatory Limbo and Taxation Concerns

India’s cryptocurrency sector continues to drift in regulatory limbo, with no fixed timeline for introducing a comprehensive regulatory framework for virtual assets. The tax regime is also seen as overly harsh, with a 30% capital gains tax, a 1% TDS on every transaction, and no provision to offset losses.

Tips for cryptocurrency investors in India: