‘Crypto’s interconnectedness with the traditional financial system is increasing’: RBI calls for global regulation

The Reserve Bank of India (RBI)  in its latest financial stability report published on December 27, 2022, revealed the Financial Stability Board (FSB) has proposed a framework for international regulation of cryptocurrencies and raised concerns that their interconnectedness with the traditional financial system is increasing. 

As per the report, it is required to promote international consistency in regulatory and supervisory approaches, which are grounded in the principle of the same activity, same risk, and same regulation approach. Their interconnectedness with the traditional financial system is increasing, the report noted.

Industry experts opined that lines between traditional finance and blockchain enable financial systems have blurred. “The move to classify cryptocurrency assets based on risk factors will empower investors to take an informed investment decision based on their risk appetite. It will also promote a sense of transparency in the cryptocurrency ecosystem as the classification sounds similar to mutual funds which are also divided into equity, hybrid, and debt categories depending on the risks involved,” Shivam Thakral, CEO, BuyUcoin, a cryptocurrency exchange told FE Blockchain.

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RBI has raised concerns about the turmoil in the cryptocurrency market highlighting the intrinsic volatility and structural vulnerabilities. It noted that the new standard includes a description of how the operational risk, liquidity, leverage ratio, and large exposure requirements would be applied to banks’ cryptocurrency assets exposure. “It is very important to address the legal and reputation risks involved with cryptocurrency assets, and the proposed classification of cryptocurrency assets into two groups will prove to be highly beneficial,” Manan Vora, senior vice president (SVP), strategy and operations, Liminal, a digital wallet infrastructure platform, said.

In addition to this, the RBI noted that there is a need to prepare comprehensive governance and effective risk management frameworks. The framework proposes that authorities should have appropriate powers, tools, and resources to regulate, supervise, and oversee cryptocurrency assets activities and markets.  “As we move towards larger participation from retail and institutional investors in the cryptocurrency market, it will be imperative to assess the exposure of banks to digital assets. This exercise will flush out the over collateralised stablecoins and ensure that cryptocurrency assets are redeemable at all times,” Vora added.

Recently, RBI Governor Shaktikanta Das has said that the next financial crisis will come from private cryptocurrencies. Das had stressed the need for the Central Bank of Digital Currency (CBDC) and claimed that CBDC needs no intermediaries.

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