RBI reiterates concerns over private cryptocurrencies

The report states that if well-designed and appropriately regulated, stablecoins could support faster, efficient, and more inclusive payments options.

Cryptocurrencies are prone to fraud and extreme price volatility, given their highly speculative nature, central bank said in its financial stability report.
Cryptocurrencies are prone to fraud and extreme price volatility, given their highly speculative nature, central bank said in its financial stability report.

The Reserve Bank of India (RBI) on Wednesday reiterated its concerns over private cryptocurrencies globally, saying such assets pose immediate risk to customer protection, complying with practices of anti-money laundering and combating financing of terrorism. Cryptocurrencies are prone to fraud and extreme price volatility, given their highly speculative nature, central bank said in its financial stability report.

Longer term concerns related to private cryptocurrencies are capital flow management, financial and macro-economic stability, monetary policy transmission and currency substitution, the report said. It added that as per the Financial Action Task Force (FATF), the virtual asset ecosystem has seen the rise of Anonymity-Enhanced Cryptocurrencies (AECs), mixers and tumblers, decentralised platforms and exchanges, privacy wallets, and other types of products and services that enable or allow for reduced transparency and increased obfuscation of financial flows.

“New illicit financing typologies continue to emerge, including the increasing use of virtual-to-virtual layering schemes that attempt to further muddy transactions in a comparatively easy, cheap and anonymous manner,” the report said. The RBI said aggregate market capitalisation of the top 100 crypto currencies has reached $2.8 trillion, while in the emerging market economies (EMEs) that are subject to capital controls, free accessibility of crypto assets to residents can undermine their capital regulation framework.

Further, the rapid growth of decentralised finance (DeFi) is geared predominantly towards speculation and investing and arbitrage in crypto assets, rather than towards the real economy, the RBI said. Limited application of anti-money laundering and know your customer (AML/KYC) provisions, together with transaction anonymity, exposes DeFi to illegal activities and market manipulation, and poses financial stability concerns, RBI said.

Lastly, the US President’s Working Group on Financial Markets has also acknowledged the rise of market capitalisation of stablecoins and outlined recommendations to protect against prudential risks. Predominantly used in the United States, stablecoins are digital assets that are designed to maintain a stable value relative to a national currency or other reference assets. Market capitalisation of stablecoins issued by the largest stablecoin issuers exceeded $127 billion as of October 2021, a nearly 500% increase over the preceding twelve months.

The report states that if well-designed and appropriately regulated, stablecoins could support faster ,efficient, and more inclusive payments options.

However, it also raises concerns related to the potential for destabilising runs, disruptions in the payment system and concentration of economic power. “It also highlights that stablecoins pose anti money laundering (AML) / combating the financing of terrorism (CFT) risks, thereby raising concerns for market integrity and investor protection. It has recommended legislative changes to address the gaps in the authority of regulators to reduce these risks,” the report said.

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