The Reserve Bank of India (RBI) has expressed its commitment to creating a global regulatory framework for crypto assets, stablecoins, and decentralized finance (DeFi). The RBI has highlighted the risks associated with these assets, including their impact on financial stability and the potential for systemic exposure. The central bank has suggested three policy responses: banning, containing, or regulating cryptocurrencies.
The Reserve Bank of India has said that one of its priorities is to create a framework for global regulation, including the possibility of prohibition, of unbacked crypto assets, stablecoins and DeFi (Decentralised Finance).
“Under India’s G20 presidency, one of the priorities is to create a framework for global regulation of unbacked crypto assets, stablecoins and DeFi, by considering both macroeconomic and regulatory perspectives to address the full range of risks posed by crypto assets, including risks specific to emerging markets and developed economies,” the RBI said in the latest edition of the Financial Stability Report.
The turmoil in crypto markets throughout 2022, which led to the bankruptcy of the largest crypto trading platform, and the failure of two banks in March 2023 have highlighted the growing linkages between the traditional banking system and the crypto ecosystem.
The central bank has said that while the market capitalisation of stablecoins is relatively small, nearly $130 billion, when compared to the traditional financial system, there is a possibility of continued interconnectedness, giving rise to financial stability risk concerns and negative spillover risks, which may be difficult to contain once the systemic exposure crosses a threshold.
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View Details »“The lack of authenticated data and inherent data gaps in the crypto ecosystem impede a proper assessment of financial stability risks,” it said.
The central bank has also said that a total ban, containment or regulation are three policy responses it has offered to deal with cryptocurrencies.
“Three policy responses (ban, contain or regulate) have been offered to address the risks posed to consumers, investors, market integrity, financial stability,” the central bank said. “A globally coordinated approach is warranted to analyse risks posed, especially on macroeconomic challenges like losing monetary control and local currency volatility, development challenges and cross border challenges. It is globally reckoned that crypto assets are speculative instruments which fail to meet key requirements to be termed as money. The stablecoin category of crypto assets has been exposed to episodes of collapse and redemption pressures in recent times.
“Reserve assets of stablecoins generally comprise of investments denominated in select freely convertible foreign currency, which would be destabilising for EMDEs through currency substitution and their large scale adoption would lead to cryptoisation of an economy, which could lead to major currency mismatch risks on the balance sheets of banks, firms, and households.”