RBI Warns Crypto Poses Risks to India’s Financial Stability
Cryptocurrencies, including stablecoins, present significant risks to India’s financial stability, according to the Reserve Bank of India (RBI).
Reaffirming its anti-crypto stance, the RBI highlighted key concerns related to digital assets in its Financial Stability Report released on December 30, 2024.
RBI Flags Risks Amid Rising Crypto Adoption
While crypto adoption has grown at the grassroots level in India throughout 2024, the RBI issued a warning against the unchecked use of digital assets. It cautioned that cryptocurrencies, especially stablecoins, could:
- Weaken monetary control
- Enable capital flight
- Divert financial resources away from the real economy
Although the crypto market in India is relatively small, the RBI noted that the narrowing divide between decentralized finance (DeFi) and traditional finance could escalate systemic risks.
Stablecoins Pose Unique Challenges
The report specifically highlighted stablecoins as a major concern due to their potential run risks and impact on monetary stability.
Citing the International Monetary Fund (IMF) and Financial Stability Board (FSB), the RBI observed that stablecoin issuers are increasingly becoming significant holders of mainstream financial assets like government securities and collateralized instruments.
This trend raises fears about their influence on economic stability and the effectiveness of monetary policy, particularly in emerging markets.
The RBI report emphasized that such developments could:
- Undermine monetary policies
- Bypass capital controls
- Strain fiscal resources
- Threaten financial stability
Central Bank Digital Currency (CBDC): A Safer Alternative
To counter the risks posed by cryptocurrencies, the RBI continues to advocate for Central Bank Digital Currencies (CBDCs) as a safer and more reliable alternative.
During the G30 39th Annual International Banking Seminar in October 2024, RBI Governor Shaktikanta Das criticized stablecoins as private money that could undermine government sovereignty by allowing private issuers to dominate the payments market.
Tokenization Raises Additional Concerns
The RBI also expressed concerns about tokenization, citing its potential to deepen ties between traditional finance and the decentralized ecosystem.
Although the tokenization market is still in its early stages, the central bank warned about associated risks, including:
- Liquidity mismatches
- Excessive borrowing
- Debt buildups on tokenized assets
- Asset price volatility
- Operational vulnerabilities
These weaknesses, according to the RBI, could spill over into the wider financial system, amplifying systemic risks and market instability.
Regulatory Uncertainty and Harsh Tax Regime Slow Growth
The RBI’s warning comes at a time when India’s cryptocurrency market remains stuck in regulatory limbo. Despite repeated demands for clear rules, the government admitted there is no fixed timeline for establishing a comprehensive regulatory framework for virtual assets.
Meanwhile, India’s tax regime continues to weigh heavily on the sector. The 30% capital gains tax, combined with a 1% TDS on every transaction and no loss offsets, has driven investors to offshore exchanges.
This capital flight not only reduces domestic trading volumes but also results in uncollected tax revenues, affecting both the government and local crypto businesses.
Final Thoughts: Balancing Growth with Stability
As cryptocurrencies gain traction globally, India faces a delicate balancing act between fostering innovation and ensuring stability.
While the RBI maintains its cautious approach, industry experts continue to advocate for regulatory clarity and tax reforms to support growth without compromising financial security.
The road ahead for India’s crypto market hinges on how policymakers address these challenges while tapping into the potential of blockchain technology and digital finance.
