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July 10, 2022

Cryptocurrency threatens financial stability, says RBI governor

Cryptocurrencies have been labeled a threat by India’s central bank governor once again. Foreword to the 25th Financial Stability Report (FSR) of the Reserve Bank of India (RBI), Governor Shaktikanta Das advocated for an aggressive response by national authorities to cope with the rising danger of the digital asset ecosystem.

According to him, assumptions about the worth of the make-believe phenomena are nothing more than speculative investments.

“Anything that is based only on supposition, with no actual foundation, is nothing more than a fancy moniker for speculative trading.” According to him, although the financial sector’s reach has been bolstered by the use of technology, its potential to disrupt financial stability must be kept in mind.

Stablecoins, according to the FSR, are similar to money market funds since they are subject to redemption risks if the underlying assets lose value or become illiquid.

Cryptocurrency markets are vulnerable since they are linked to regulated financial institutions, according to the paper.

According to a study, “one stablecoin lost virtually all of its value and another de-pegged from the US dollar, underlining the need for regulatory guardrails to preserve financial stability, as well as consumer and investor protections.”

According to the RBI, cryptocurrencies account for only 0.4% of all financial assets on the planet. Although the risks are low at the moment, the report said that “as these assets and the ecosystem enabling their development are growing, the associated risks are expected to expand.”

The top five cryptocurrencies, according to the RBI’s Financial Stability Report, account for 75% of the $908.7 billion market capitalization of the cryptocurrency sector.

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A CBDC (central bank digital currency) is digital money denominated in the national unit of account that is a liability of the central bank, according to the FSR. Both advanced economies (AE) and emerging market economies (EMEs) have increased their involvement in projects related to CBDCs (central bank digital currencies).

Nirmala Sitharaman, India’s Finance Minister, said earlier this year that the Indian CBDC will be launched this year. According to the RBI’s annual report for 2022, the digital rupee would be introduced gradually. According to the statement, the country’s monetary policy should be adhered to by the CBDC. As a result, the Indian central bank wants the CBDC to have little or no impact on the country’s current payment and settlement systems.