Dubbing digital assets as emerging risks on the horizon, the Reserve Bank of India’s Governor Shaktikanta Das on Thursday said cryptocurrencies are a clear danger and speculation under a sophisticated name.
Why Bank Governor Is Issuing Crypto Warning: “We must be mindful of the emerging risks on the horizon. Cryptocurrencies are a clear danger. Anything that derives value based on make-believe, without any underlying, is just speculation under a sophisticated name,” the Indian central bank’s governor said in the foreword to the 25th issue of the RBI’s financial stability report.
While technology has supported the reach of the financial sector and its benefits must be fully harnessed, he said its potential to disrupt financial stability has to be guarded against.
“As the financial system gets increasingly digitalized, cyber risks are growing and need special attention,” he said.
Cryptos And 'Dollarization': The report noted that private currencies result in "dollarization", meaning they create a parallel currency system that can undermine sovereign control over the money supply, interest rates and macroeconomic stability.
The report further said cryptocurrencies can erode capital account regulation for developing economies, which can weaken exchange rate management.
“Furthermore, cryptocurrencies can lead to disintermediation from the formal financial system, impairing financial stability,” the report states.
RBI Concerned With Unbacked Crypto Assets: Vulnerabilities associated with unbacked crypto assets, stablecoins and decentralized finance (DeFi) and crypto exchanges were also examined by the report.
“Several vulnerabilities associated with crypto-asset markets have been highlighted such as linkages between crypto-asset markets and the regulated financial system; liquidity mismatch, credit, and operational risks, with the potential spillover to short-term funding markets; increased use of leverage in investment strategies; concentration risk of trading platforms; and opacity and lack of regulatory oversight of the sector,” the report further noted.
The report stated that DeFi presented risks such as speculative trading, flash loans, cross-border lending and borrowing, front running, cybersecurity, asymmetry and fraud, among others.
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