Backing cryptocurrencies is not a possibility as such a step could undermine the role of the rupee as a currency and impact the ability of authorities to influence money supply, Reserve Bank of India (RBI) deputy governor T Rabi Sankar said on Monday.
“Every private currency will eventually replace the rupee to some extent. Consequently, the role of the rupee as a currency will be undermined. With one or more private currencies being allowed, there would be parallel currency system(s) in the country. Thus, increased acceptance of cryptocurrencies would result in effective ‘Dollarization’ of our economy,” Sankar said, according to a copy of his speech at an industry event. Dollarisation refers to a phenomenon where the US dollar is used in addition to or instead of the domestic currency of another country.
Such a development would undermine the ability of authorities to control money supply or interest rates, as monetary policy would not have any impact on the non-rupee currencies or payment instruments, Sankar said. “When that happens, India loses not just its currency, a defining feature of its sovereignty, but its policy control of the economy. With loss of traction for monetary policy, the ability to control inflation would be materially weakened.”
If private currencies are permitted, the deputy governor said, the banking system’s ability to mobilise deposits in rupees, and consequently, the ability to create credit, would diminish. Credit creation in convertible currencies would be impervious to monetary policy. In the extreme case where a major part of deposits and credit shift to cryptocurrencies, the result would be a weakened, even crumbling, banking system, impairing financial stability, said Sankar.
There are already indications that private cross-border flows are taking place in cryptocurrencies, according to Sankar. “If this trend is legitimised, a part of the flows related to trade payments, personal remittances or cross border investments would be made in these cryptocurrencies. As they are non-reserve currencies, this could have adverse implications for India’s foreign exchange reserves, which lend stability to the external sector,” he said.
Besides, such cryptocurrency payments can take place outside the ambit of capital account regulations. This would adversely affect the integrity of the capital account regime, as policy control on capital flows would be eroded. The consequence of this on foreign exchange reserve accretion and exchange rate management raises serious macroeconomic stability issues, Sankar said.
“We should in fact be more concerned about stablecoins because they would be more effective as currency than volatile cryptocurrencies,” he said in response to the argument that stablecoins are safer than other cryptos because they are pegged to specific assets.
India must be more circumspect in its approach to cryptocurrencies than advanced economies (AEs) as India is not similarly placed as AEs, Sankar said. “We should particularly be alert to the possibility that these private currencies can be used for global strategic control. If, for example, some private currency substantially replaces the rupee, the corporate which manages that cryptocurrency (or the country which has control of that corporate) can practically control India’s economic policy,” he added.
Sankar said that it is not even feasible to allow crypto investments as a store of value rather than as a medium of exchange. “‘Store of value’ demand is a more substantial source of demand for a currency than transaction demand. One only needs to compare the volume of time deposits with transactional deposits to understand this,” he said.
If a cryptocurrency is used as a store of value the same concerns arise again. Also, unlike the value of the rupee, which is anchored by monetary policy and its status as legal tender, the value of crypto assets rests solely on the expectation that others will also value and use them. “Since valuation is largely based on beliefs that are not well anchored, it is bound to have a de-stabilising effect on the monetary and fiscal stability of a country, even while it is not permitted to operate as a legal tender,” Sankar said.
Cryptocurrencies are not currencies or financial assets or real assets or even digital assets. Therefore, it cannot be regulated by any financial sector regulator, the deputy governor said. “It is not possible to regulate something that one cannot define.”