The Reserve Bank of India (RBI) has once again expressed concerns over the growing digital asset ecosystem. In particular, it cited the recent turmoil in the cryptocurrency sector as one of the global micro financial risks.
In its latest Financial Stability Report, the Indian central bank says a common approach is necessary to ensure consumer and investor protection and address future financial stability risks.
“In this context, various options are being considered internationally. One option is to apply the same-risk-same-regulatory-outcome principle and then to the same regulation applicable to traditional financial intermediaries and exchanges. Another option is to prohibit crypto assets since their real life use cases are next to negligible.”
The RBI’s report discusses several recent incidents from the broader crypto market to highlight volatility and risks for investors. It cites the recent brief pause in withdrawals of stablecoins at Binance, the implosion of the Terra/Luna ecosystem, and the collapse of Celsius and Three Arrows Capital to stress the point that crypto assets are “highly volatile.”
It says crypto assets have shown a correlation with equities. The claim that cryptocurrencies are a hedge against inflation stands exposed as crypto prices are also down at a time when inflation is high, the report said.
The Indian central bank, however, stated in its report that crypto market volatility had not affected the formal financial system.
“Although the crypto assets market remains volatile, there have not yet been any spillovers onto the stability of the formal financial system. The accumulated experience suggests that they form an unstable ecosystem, and there is growing evidence that they remain highly concentrated and interconnected,” it said.
RBI Governor Shaktikanta Das has been a known and vocal critic of cryptocurrencies. Recently, he grabbed media headlines stating that if cryptocurrencies are allowed to grow, it can cause the next global financial crisis. He argues that cryptocurrencies have no underlying value, making them a purely speculative activity.
But despite RBI’s opposition and the government’s indecision about regulating the digital assets sector, various studies suggest that at least 7% of the Indian population holds digital assets. In the 2022 Chainalysis grassroots crypto adoption index, India stands among the top 10 countries.
The RBI launched a CBDC pilot for the wholesale segment on November 1 and for the retail segment on December 1.
Early this year, the Indian government introduced 1% TDS as the transaction tax on crypto trading. The industry decried the moving terming it exorbitant. However, the government did not relent. As a consequence, crypto trading on Indian exchanges became unattractive and complicated, driving away investors and bringing down trading volume sharply.