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Business News/ News / India/  Cryptocurrencies are a clear danger, says RBI governor Das

Cryptocurrencies are a clear danger, says RBI governor Das

Tech’s  benefits  must  be  harnessed  but  its  potential  to  disrupt  financial  stability  has  to  be  guarded  against
  • As the financial system gets increasingly digitized, cyber risks are growing and need special attention
  • Anything that derives value based on make-believe, ‘without any underlying’, is just speculation under a sophisticated name, Das says. (Photo: PTI)Premium
    Anything that derives value based on make-believe, ‘without any underlying’, is just speculation under a sophisticated name, Das says. (Photo: PTI)

    Terming cryptocurrencies a “clear danger", Reserve Bank of India (RBI) governor Shaktikanta Das on Thursday said that anything that derives value based on make-believe, “without any underlying", is just speculation under a sophisticated name.

    “While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against," Das said in the foreword to RBI’s Financial Stability Report released on Thursday. As the financial system gets increasingly digitalized, cyber risks are growing and need special attention, he said.

    Das has voiced his concerns on cryptocurrencies multiple times, citing macroeconomic and financial stability risks. In February, he said people investing in cryptocurrencies are doing so at their own risk and must be aware that these have no underlying asset, “not even a tulip", referring to the Dutch tulip bulb asset bubble in the 1600s.

    While highlighting the overall resilience of Indian financial institutions, Das said one must be mindful of the emerging risks on the horizon. “The growing threat of the crypto-assets ecosystem warrants drastic approaches by national authorities," the report said.

    Technological advances powered by cryptography and distributed ledger technology have led to the rise of new digital assets such as cryptos and stablecoins, which are primarily used for speculative investments, RBI said. The market value of crypto assets grew tenfold from early 2020 to late 2021 when it peaked at almost $3 trillion, before recording a sharp decline below $1 trillion in June 2022, the Financial Stability Report said. It cited data from coinmarketcap, a price-tracking website for crypto assets.

    RBI said risks from crypto assets to financial stability are currently limited as the overall size is small—0.4% of global financial assets—and their inter-connectedness with the traditional financial system is restricted. The associated risks are, however, likely to grow as these assets and the ecosystem supporting their growth are evolving.

    “The risks from 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 similar redemption risks and investor runs because they are backed by assets that can lose value or become illiquid in times of market stress," RBI said.

    The market capitalization of 19,920 cryptocurrencies trading on 528 exchanges stood at $908.7 billion as of 17 June. Bitcoin accounts for 44% of this market capitalization.

    “Historically, private currencies have resulted in instability over time and in the current context, result in ‘dollarisation’, as they create parallel currency systems, that can undermine sovereign control over money supply, interest rates and macroeconomic stability," RBI said, adding that for developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management.

    The term dollarization refers to the use of any foreign currency by another country, according to an International Monetary Fund (IMF) paper.

    Meanwhile, India is preparing a consultation paper on crypto currencies which could set the course of future regulations. Last week, the Central Board of Direct Taxes amended income tax rules to specify ways to comply with the new tax deducted at source provision on virtual digital assets that kicks in from 1 July.

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    Shayan Ghosh
    Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 30 Jun 2022, 05:08 PM IST
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