Crypto poses risks to India’s financial stability: RBI

According to the Reserve Bank of India, cryptocurrencies, including stablecoins, pose significant risks to financial stability.

Reiterating its anti-cryptocurrency stance for a long time, RBI pointed out various risks related to digital assets in its Financial Stability Report of December 30, 2024.

While cryptocurrency adoption has increased at a grassroots level in India this year, the RBI has raised a red flag, warning that uncontrolled use of digital assets, including stablecoins, could loosen monetary reins, open backdoors for capital flight and “divert available resources to finance the enterprise” . real economy.”

While the crypto market in India “remains small”, the narrowing gap between decentralized and traditional finance could pose systemic risks and stablecoins pose potential risk exposure, according to the regulator.

Citing the International Monetary Fund – Financial Stability Board report, the RBI added that stablecoin issuers have become significant holders of mainstream financial assets such as government bonds and other collateral, raising concerns about their impact on economic stability.

The report noted that stablecoins pose unique challenges, particularly in emerging markets where “country-specific macroeconomic and demographic factors” are driving increased use:

“These developments could undermine the effectiveness of monetary policy, circumvent capital controls, strain fiscal resources and threaten financial stability.”

For years, India’s central bank has touted central bank digital currencies as a more reliable alternative to stablecoins. During the G30 39th Annual International Banking Seminar in October, RBI governor Shaktikanta Das labeled stablecoins as private money; This could weaken the government’s sovereignty by allowing private issuers to dominate the payments market.

Tokenization is another area of ​​interest to the RBI due to the sector’s potential to “deepen the interconnectedness between the traditional financial system and the decentralized financial system.”

Although the tokenization market remains in its early stages, the RBI is concerned about the risks it may pose, including “liquidity and maturity mismatches”, excessive borrowing or liabilities based on tokenised assets, “asset price and quality risks” and “operational operational risks”. vulnerabilities.”

The report emphasized that these vulnerabilities could spread to the broader financial system, increasing systemic risks.

The RBI’s warning comes at a time when India’s cryptocurrency sector continues to drift in regulatory uncertainty. Despite calls for clarity on regularity, the government recently admitted there is “no fixed timeline” for the introduction of a comprehensive regulatory framework for virtual assets.

Meanwhile, India’s crypto market remains burdened by a tax regime seen as overly harsh, with a 30 percent capital gains tax, 1 percent TDS on every transaction and no provision to offset losses.

According to a recent report, this is fueling capital flight and leading to both uncollected taxes for the government and significant revenue losses for local crypto service providers due to reduced trading activity as traders shift to offshore exchanges.