Private cryptocurrencies pose immediate risks to customer protection and anti-money laundering (AML) and combating the financing of terrorism (CFT), the Reserve Bank of India (RBI) Financial Stability Report (FSR) noted on December 29.
"They are also prone to frauds and to extreme price volatility, given their highly speculative nature. Longer-term concerns relate to capital flow management, financial and macro-economic stability, monetary policy transmission and currency substitution," the report said.
These comments assume significance in the context of ongoing debates on whether India should ban private cryptocurrencies or not. The RBI, time and again, has highlighted the deeper macroeconomic concerns posed by the unregulated private cryptocurrency market in India. However, the central bank is open to the idea of introducing a Central Bank Digital Currency (CBDC).
The Indian government is in the process of framing a national law to regulate the cryptocurrency market.
Also, 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 FSR report noted.
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 said.