Cryptocurrency is a Clear Danger to Financial Stability ⋆ ZyCrypto

India’s central bank governor has once again given the thumbs down to cryptocurrencies and called them a danger. In the foreword to the Reserve Bank of India’s (RBI) 25th Financial Stability Report (FSR), RBI Governor Shaktikanta Das called for a drastic approach by national authorities to deal with the growing threat from the digital assets ecosystem. 

Reiterating his old stance on cryptocurrencies, he said values driven by the make-believe phenomenon are just speculations. 

“Anything that derives value based on make-believe, without any underlying, is just speculation under a sophisticated name. While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against,” he said.

Threat to Financial Stability 

The FSR likened stablecoins to money market funds and said they run redemption risks in times of stressed market when assets backing them may lose value or become illiquid.  

The report pointed out several vulnerabilities of cryptocurrency markets and highlighted their linkages with regulated financial systems as one of them.

“One of its early ramifications is reflected in the crypto ecosystem with one stablecoin losing almost all its value and another de-pegging from the US dollar, underscoring the need for regulatory guardrails to ensure financial stability and consumer and investor protection,” the report added.

The RBI report noted that cryptocurrencies constitute a minuscule 0.4% of global financial assets. Although the risks are limited right now, it said, “However, the associated risks are likely to grow as these assets and the ecosystem supporting their growth are evolving.” 

Presenting its assessment of the cryptocurrency market, RBI’s Financial Stability Report said that the top five cryptocurrencies account for 75% of the industry’s $908.7 billion market cap.   

A Case for CBDC 

“It is in this context that central banks in both AEs (advanced economies) and EMEs (emerging market economies) have become increasingly engaged in projects related to CBDCs (central bank digital currencies) – digital money that is denominated in the national unit of account and is a liability of the central bank,” the FSR said.

Earlier this year, Indian Finance Minister Nirmala Sitharaman announced to launch of the Indian CBDC in the current financial year. The RBI in its annual report for 2022 has said that it plans to introduce the digital rupee in a graded manner. It also said that it wants the CBDC to conform with the country’s monetary policy. Besides, the Indian central bank wants the CBDC to create little or no disruption in the existing payments and settlement systems.