Cryptocurrency transactions are not limited to the national borders. But the problem with such international transactions is that they will deprive the nation of the needed foreign exchange.
Cryptocurrency will undermine the role of currencies, including the rupee. As a result, backing cryptos is not a step if done, it would impact the ability of authorities to influence the money supply, said RBI deputy governor T Rabi Sankar on Monday.
He continued, adding that accepting it will lead to the emergence of a parallel currency system in the country, where the rupee would exist with two or more cryptocurrencies. This would lead to the dollarization of an economy.
Dollarization is a phenomenon where the US dollar is used in addition to or instead of the domestic currency of another country whose currency is facing severe inflation.
As in the former case, such a scenario will undermine the ability of authorities to control money supply or interest rates. These non-rupee currencies or payment instruments are outside RBI’s monetary policy jurisdiction.
If that happens, India not just loses its currency, but also its control over the economy. With that, the ability to control inflation would be weakened. It would also diminish the banking system’s ability to mobilize deposits in rupees and the ability to create credit.
This would weaken the banking system and impair financial stability.
Another dangerous trend is cross-border transactions using cryptocurrencies. If it is legitimized, the nation’s foreign exchange reserves will be in grave danger.
It’s source, trade payments, personal remittances, cross border investments would be made in cryptocurrencies. These currencies are non-reserve currencies. That will lead to a shortage of foreign reserves and lead to instability in the external sector.
It would also affect the capital account regime because these transactions occur outside the ambit of capital account regulations. This would lead to erosion of policy control on capital flows, and would result in macroeconomic stability issues.
He prefers Stablecoins for their stability to volatile cryptocurrencies. India should be careful in its approach towards cryptocurrency compared to advanced economies.
These private currencies may be used for global strategic control. In some cases, the mother company or the base nation could control the user nation’s economic policy.
He said that it is not feasible to allow crypto investments as a store of value rather than as a medium of exchange. Store of value demand is a more important source of demand for a currency than transaction demand.
Unlike the rupee that is anchored by monetary policy and its status as legal tender, the value of crypto assets rests solely on the expectation that it also rises in value based on belief.
Cryptocurrency cannot be regulated by any financial sector regulator, because it is neither currency nor financial assets or real assets or even digital assets.
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