RBI Governor Shaktikanta Das once again pounded hard upon cryptocurrencies today, with the RBI pointing out at the same time that crypto assets are a miniscule part of the entire global financial assets. “… we must be mindful of the emerging risks on the horizon. Cryptocurrencies are a clear danger,” Shaktikanta Das said, reiterating his warning that cryptocurrencies a threat to financial stability. “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,” he said in his foreword to the Financial Stability Report (FSR) for June 2022.
This is among a series of warnings RBI officials have issued against the risks posed by crypto assets to the financial system. As the financial system gets increasingly digitised, cyber risks are growing and need special attention, Shaktikanta Das said. The FSR observed that at present the risks from crypto assets to financial stability appear to be limited, with the overall size being just 0.4% of global financial assets and their interconnectedness with the traditional financial system being restricted. However, the associated risks are likely to grow as these assets and the ecosystem supporting their growth are evolving.
Currently, the market capitalisation of a total of 19,920 cryptocurrencies trading on 528 exchanges stands at $908.7 billion, with Bitcoin accounting for 44% of this market capitalisation. The top two cryptocurrencies account for 59%, while the top five account for more than three fourths, the FSR said. The risks from stablecoins that claim to maintain a stable value against existing fiat currencies require close monitoring, in particular, according to the report. These 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.
Historically, private currencies have resulted in instability over time and in the current context, result in ‘dollarisation’, as they create parallel currency systems, the FSR said. Such parallel systems can undermine sovereign control over money supply, interest rates and macroeconomic stability. For developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management. “Furthermore, cryptocurrencies can lead to disintermediation from the formal financial system, impairing financial stability,” the RBI said.
Although the degree of cryptoisation thus far appears limited, its growth circumvents 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 to payment systems and adversely affect real economic activity.
“It is in this context that central banks in both AEs (advanced economies) and EMEs (emerging market economies) have become increasingly engaged in projects related to CBDCs (central bank digital currencies) – digital money that is denominated in the national unit of account and is a liability of the central bank,” the FSR said. The government and the RBI have earlier said that India will roll out a digital rupee in FY23.