Cryptocurrencies, including stablecoins, pose significant risks to financial stability, according to the Reserve Bank of India.
Reiterating its long-held anti-crypto stance, the RBI in its December 30 report highlighted the various risks associated with digital assets. Financial Stability Report for 2024.
While cryptocurrency adoption boomed at grassroots levels in India this year, the RBI raised a red flag, warning that unchecked use of digital assets, including stablecoins, could loosen monetary reins, open backdoors for capital flight and “deplete the available resources for the financing of the economy.” real economy.”
According to the regulator, while the crypto market in India “remains small,” the narrowing gap between decentralized and traditional finance could pose systemic risks, with stablecoins bringing the added danger of potential risks.
Citing the International Monetary Fund – Financial Stability Board report, the RBI added that stablecoin issuers are becoming significant holders of mainstream financial assets such as government bonds and other collateral, raising concerns about their impact on economic stability.
Stablecoins also pose unique challenges, especially in emerging markets where “country-specific macroeconomic and demographic factors” have led to increased use, the report said, adding:
“These developments could undermine the effectiveness of monetary policy, circumvent capital controls, put pressure on budgetary resources and threaten financial stability.”
Over the years, India’s central bank has promoted central bank digital currencies as a more reliable alternative to stablecoins. At the G30’s 39th annual International Banking Seminar in October, RBI Governor Shaktikanta Das labeled stablecoins as private money, which could undermine government sovereignty by allowing private issuers to dominate the payments market.
Tokenization is another area of concern to the RBI due to the sector’s potential to “deepen the interconnectedness between the traditional financial system and the decentralized financial system.”
While the tokenization market is still in its early stages, the RBI is concerned about the risks it could pose, including “liquidity and maturity mismatches,” excessive borrowing or debt built on tokenized assets, “asset price and quality risks’ and ‘operational risks’. vulnerabilities.”
The report highlighted that these vulnerabilities could spill over into the broader financial system, increasing systemic risks.
The RBI’s warning comes at a time when the Indian cryptocurrency sector remains in regulatory limbo. Despite calls for clarity on the regularity, the government recently admitted that there is “no set timeline” for the introduction of a comprehensive regulatory framework for virtual assets.
Meanwhile, the Indian crypto market continues to suffer from a tax regime that is considered overly strict, with a capital gains tax of 30%, a TDS of 1% on each transaction and no provision to offset losses.
According to a recent report, this is leading to capital flight, causing significant revenue losses for both the government in the form of uncollected taxes and domestic crypto service providers due to declining trading activity as traders switch to offshore exchanges.
