Cryptocurrencies are huge risks to financial stability and monetary stability, Reserve Bank of India Governor Shaktikanta Das said Friday, asserting that it may create a situation where the central bank could lose control over money supply in the economy.
“I am actually of the opinion that this is something which should not be allowed to dominate the financial system because it has huge financial stability risks, it has huge monetary stability risks, and it also poses risks to the banking system. It may create a situation where the central bank could lose control of the money supply in the economy,” RBI Governor Shaktikanta Das said during his appearance at the Peterson Institute for International Economics, a think tank.
“If the central bank loses control of money supply in the economy, how does the central bank check liquidity available in the system? How does a central bank control inflation by squeezing money supply or by loosening money supply in times of crisis? So, we see crypto as a big risk, and there has to be an international understanding because the transactions are cross-country,” he said in response to a question.
“There has to be an international understanding on this issue, being fully mindful of the huge risks associated with cryptocurrencies. This is not something which I feel should be encouraged. This view is not a very popular one, but I think as custodians of financial stability, it is a major concern for central banks worldwide. Governments are also becoming increasingly aware of the possible downside risks in cryptocurrencies,” Das said.
India, he noted, was the first country to raise questions about cryptocurrencies. Under the G20, during the Indian presidency, there was an agreement to develop an international understanding of how to deal with this entire crypto ecosystem. Some progress has been made in this regard, he added.
“I think more work still needs to be done. From India’s and the Reserve Bank’s perspective, we are one of the first central banks to very clearly voice serious concerns about the so-called cryptocurrencies. We see them as big risks, huge risks to financial stability, and there are good reasons why we are saying that,” he said.
“First, we have to understand the origin of cryptocurrencies. The origin was to bypass the system. Cryptocurrencies have all the qualities of money. The fundamental question is: are we, as authorities, and governments comfortable with privately issued cryptocurrencies that have all the features of currency issuance? Currency issuance is a sovereign function. So, the bigger question is whether we are comfortable with crypto, which has the characteristics of being a currency, or whether we are comfortable with having a private currency system in parallel to the fiat currency,” he added.
“Obviously, if a certain part of your economy is dominated by crypto assets or private crypto assets, then the central bank loses control over the entire monetary system. This would lead to significant instability in the monetary system and could also promote instability in the financial sector. So, there are very big risks,” he said.
“Therefore, in India, we have been articulating that we have to deal with this very carefully. Countries, of course, will take their own decisions, but we feel it should be approached cautiously and dealt with very carefully,” Das said.
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