Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units, and verify the transfer of funds. They operate independently of a central bank. Crypto assets open up a fascinating new world of opportunity to the discerning. They include, quick and easy payments, innovative financial services, and inclusive access to previously unbanked sections of society.
Cryptocurrencies pose a new set of challenges to financial stability, which need to be carefully considered. Unless regulators step in and ensure adequate disclosure and oversight, consumer protection risks continue to remain substantial. Much of the crypto ecosystem lacks strong operational, governance and risk-management practices. There are also several high-profile cases of hacking-related issues of customer funds. Until all these are conclusively resolved, the RBI is right in saying that Indian citizens should refrain in dealing with cryptocurrencies.
With steady advances in online technologies, cybersecurity management is not a one-time event, but a continuous process. However, as crypto assets become more mainstream, their importance in terms of implications for the economy at large, will rise. It is just a matter of time before many central banks will need to legitimize the use of most cryptocurrencies in their national interest. However, the process should not be rushed through, as supervision and enforcement is not only complex, but almost impossible without international collaboration. The crypto ecosystem also falls under different regulatory frameworks in different countries, thus complicating global coordination.
Until crypto assets do not become legal tender, their use should be curbed ... or at least, restricted. The cryptoization of the currency can reduce the ability of the central bank to effectively implement monetary policy. It could also create financial stability risks, for example, through funding, and solvency risks arising from currency mismatches. Threats to fiscal policy could also rise, given the potential of crypto assets to facilitate tax evasion. With the rising demand for digital currency, India is fuelling one of the world’s fastest growing crypto regions. The past year has seen a number of twists and turns for India’s crypto market, including on the regulatory front. India’s cryptocurrency investors are often part of larger and more sophisticated organizations. In this regard, the introduction of an RBI-backed digital currency could help reduce cryptoization pressures, if it genuinely fulfils the need for better payment technologies.
With a sustained rise in digitalization, cryptocurrencies are likely to penetrate the financial system sooner or later. To begin with, regulators need to be able to monitor the rapid developments in the crypto ecosystem and the risks they pose. This could be done by swiftly tackling existing data gaps in the economy, especially in the finance and banking sectors. National regulators should also prioritize the implementation of existing global benchmarks. A proportionate legislation to the local digital currency could be considered. Cushioning the overall volatile impact of cryptocurrencies would necessitate strengthening macroeconomic policies and minimizing the operational and financial integrity risks of the crypto providers.
To quote Shakespeare, time and tide wait for no man. Policy action needs to be decisive, swift and well-coordinated globally. The ultimate aim of the national monetary authorities should be to allow the benefits of cryptocurrencies to flow unhindered, but also, simultaneously, address all the prevailing vulnerabilities in the system