Reserve Bank of India warns Govt and investors on cryptocurrency investment

Reserve Bank of India warns Govt and investors on cryptocurrency investment

The Reserve Bank of India on February 11, maintained key policy rates unchanged while retaining its accommodative stance. This means that existing and new borrowers will continue to enjoy same interest rates for now. Moreover, several banks have rolled out festive offers with discounted interest rates for home loans as also other retail loan categories. Existing borrowers can use this opportunity to reduce their interest burden by switching lenders.

Cryptocurrency is a threat to India’s macroeconomic stability and investors betting on it are doing it at their own risk, RBI Governor Shaktikanta Das said on February 10 in perhaps his starkest warning on crypto that is gaining popularity in the country.

Speaking to the media after sharing the monetary policy committee report, Das said, “As far as cryptocurrencies are concerned, the RBI stance is very clear. Private cryptocurrencies are a big threat to our financial and macroeconomic stability." "They will undermine RBI's ability to deal with issues related to financial stability.”

This is the first statement coming from the country’s top banker after the government acknowledged the existence of cryptocurrency by making it a taxable asset in the Union Budget 2022.

Das went ahead to caution crypto investors and said there was immense risk involved. He further explained “I think it is my duty to tell investors that what they are investing in cryptocurrencies, they should keep in mind that they are investing at their own risk. They should keep in mind that these cryptocurrencies have no underlying (asset). Not even a tulip,” Das said.

The growing popularity of cryptocurrencies is often equated with the Tulip Mania that gripped parts of Europe, especially Holland, in the 17th century, which ended in a spectacular crash. Das’ repeated assertions that cryptocurrencies are a threat to macroeconomic stability are a signal that the North Block should be careful while dealing with the crypto lobby in the country.

Despite RBI’s repeated warning, investors continue to invest in crypto assets. The government's move to tax digital assets is being projected as legal recognition by the crypto lobby to lure new investors. ‘Tax alone won’t cut it’ is what the RBI, Governor has warned. Das has given a clear message to the government that it needs to apply caution when recognising cryptocurrency in the country and thereby allowing investors to invest their hard-earned money in these assets.

Union Finance Minister Nirmala Sitharaman while presenting the Budget, imposed a 30 percent tax on private digital assets. In doing so, the government ignored the repeated public warnings by the RBI on crypto assets. In the Financial Stability Report (FSR) released on December 29, the RBI highlighted several concerns on private cryptocurrencies. It has indicated serious implications the instruments pose and the immediate risks to customer protection and anti-money laundering (AML) and combating the financing of terrorism (CFT).

“Cryptos are also prone to frauds and extreme price volatility, given their highly speculative profile. Long term concerns relate to capital flow management, financial and macro-economic stability, monetary policy transmission and currency substitution," the report said.

The report explains how the proliferation of private cryptocurrencies across the globe has sensitised regulators and governments to the associated risks, the FSR report said. The report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the financial system.

“New illicit financing typologies continue to emerge, including the increasing use of virtual-to-virtual layering schemes that attempt to further muddy transactions in a comparatively easy, cheap and anonymous manner,” the report has mentioned. The aggregate market capitalisation of the top 100 cryptocurrencies has reached $2.8 trillion in the emerging market economies that are subject to capital controls, and free accessibility of crypto assets to residents can undermine their capital regulation framework, the report has underlined.

In a media interaction post the MPC announcements, RBI governor Shaktikanta Das reiterated the apex bank's long-standing hostile stance of cryptocurrency, stating that "private cryptocurrencies are a big threat to India."

The million dollar question is how will the government ensure that these risks do not manifest? Isn’t it allowing an advantage to the crypto lobby to transact freely given the only condition that a certain amount of tax needs to be paid?

The RBI’s concerns that crypto assets can be used for clandestine activities and illegal transactions are wide in the open. Taxation of the instrument doesn’t reduce the crypto risk! Das’ not-so-cryptic warning is another serious warning to the government and investors alike.