Cryptos can undermine sovereign control over money supply and weaken exchange rate: RBI report

The Reserve Bank of India (RBI) has reiterated its opposition to cryptocurrencies and highlighted how they can undermine sovereign control over the money supply, as well as weaken the exchange rate, again highlighting the danger posed by cryptocurrencies for India and other developing countries in general.

In its latest Financial Stability Report of June 2022, the RBI stated that cryptocurrencies are essentially private currencies, and as seen, “Historically, private currencies have led to instability and dollarization, as they create parallel monetary systems, which can undermine sovereign control over the money supply, interest rates and macroeconomic stability.

He said cryptocurrencies cannot be considered “currencies” because they have no issuer. This is why they are not a debt instrument or a financial asset, nor do they have any intrinsic value. This is also the reason why they can undermine the existing financial stability.

“For developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management. Furthermore, cryptocurrencies can lead to disintermediation of the formal financial system, undermining financial stability,” the RBI report states.

The other danger, according to the report, is that cryptocurrencies are created on the decentralized system, which is designed to bypass the financial system and all of its controls, including anti-money laundering (AML) and/or or the fight against financial terrorism (CFT) and knowing your client’s settlement (KYC).

He further stated that cryptocurrencies are characterized by highly volatile prices, as evidenced by the large fluctuation in the market value of crypto assets, which increased tenfold from the start of 2020 to the end of 2021, peaking at almost 3 trillion. dollars, before dropping sharply below. 1 trillion US dollars.

“The risks of stablecoins that claim to maintain stable value relative to existing fiat currencies require close monitoring, in particular – they are akin to money market funds and face redemption risks and investor runs similar because they are backed by assets that may lose value or become illiquid during times of market stress,” the report added.

The report further indicates that at present, the risks related to crypto assets for financial stability currently appear to be limited because their overall size is small (0.4% of global financial assets) and their interconnection with the traditional financial system. is also limited. . That said, the risks could increase as these crypto assets and their supporting ecosystem evolve.

About the author