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 outcome, 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.
Investors be warned
Das cautioned crypto investors and said there was immense risk involved.
“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 is a signal that the North Block should be careful while letting the crypto lobby loose.
Despite RBI’s repeated warning, investors continue to put money in crypto assets. The government's move to tax digital assets is being projected as legal recognition by the crypto lobby to lure investors.
Tax alone won’t cut it
Das has given a clear message to the government that it needs to be careful while recognising crypto and letting investors put 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. Catch all lives updates of RBI Monetary Policy here
In doing so, the government ignored the repeated public warnings by the RBI on crypto assets.
Let’s first understand why the RBI is opposing crypto. In the Financial Stability Report (FSR) released on December 29, the RBI highlighted several concerns on private cryptocurrencies.
It said these instruments pose immediate risks to customer protection and anti-money laundering (AML) and combating the financing of terrorism (CFT).
“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.
Not just that, the proliferation of private cryptocurrencies across the globe has sensitised regulators and governments to the associated risks, the FSR report said.
Also read: RBI Monetary Policy: Key takeaways from the announcements
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 said.
Also read: Explained | Shaktikanta Das presents a non-event policy for markets, plays waiting game
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.
So, how will the government ensure that these risks do not manifest? Isn’t it leaving the field open to the crypto lobby to transact freely only on the condition that a certain amount of tax has to be paid?
The fact is the crux of the RBI’s concerns that crypto assets can be used for illegal activities and muddy transactions remain.
Just making the instrument taxable doesn’t reduce the crypto risk. Das not-so-cryptic warning is yet another warning to the government and investors alike.
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