India’s Reserve Bank has offered a scathing assessment of cryptocurrencies in its latest financial stability report – saying the risks they create demand attention before they undermine established institutions.
“Cryptocurrencies are a clear danger,” the report baldly declares in its Foreword, penned by Reserve Bank governor Shaktikanta Das. “Anything that derives value based on make believe, without any underlying [value], is just speculation under a sophisticated name.”
The report doesn’t assess cryptocurrency as an immediate danger, noting that crypto assets represent just 0.4 percent of all financial assets and their interoperability with the traditional financial system is “restricted”.
But the Bank sees trouble on the horizon.
“The associated risks are, however, likely to grow as these assets and the ecosystem supporting their growth are evolving,” the report states. “The risks from stablecoins that claim to maintain a stable value against existing fiat currencies require close monitoring, in particular – they 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.”
Another concern is that cryptocurrencies “are designed to bypass the financial system and all its controls, including Anti Money Laundering (AML)/Combatting the Financial Terrorism (CFT) and Know Your Customer (KYC) regulations.”
The report also notes that, historically, private currencies have not ended well.
“They create parallel currency system(s), which can undermine sovereign control over money supply, interest rates and macroeconomic stability,” the report argues, adding “For developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management.”
The report also warns that FinTech companies pose various risks, and that powerful, cashed-up tech companies may make matters worse.
“BigTechs can scale up rapidly and pose risk to financial stability, which can arise from increased disintermediation of incumbent institutions,” the document asserts.
“Moreover, complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour.”
BigTechs can scale up rapidly and pose risk to financial stability
The document also weighs central bank digital currencies (CBDCs) and notes that while they’ll be considered a digital alternative to cash and individuals may have stored balances of the currencies, current thinking is that such deposits won’t attract interest payments. That’s of concern, the report states, because shifting money out of banks and into government-run CBDC wallets “could potentially decrease credit availability or increase credit costs.”
India plans its own CBDC and wants it to become the heart of a global digital payment scheme. The nation has also introduced a hefty 30 percent tax on cryptocurrency income – a rate double the nation’s capital gains tax – and taxes crypto transactions at one percent of value.
The Reserve Bank’s report comes hot on the heels of China’s state-sponsored blockchain boosters labelling cryptocurrency a Ponzi scheme, and Singaporean authorities warning crypto cowboys they’ll be run out of town if they misbehave. ®