RBI Raises Red Flags Over Stablecoins And Crypto Assets' Impact On India’s Economic And Financial Stability

The Reserve Bank of India (RBI) issued a stern warning on Monday (30 December) regarding the widespread use of crypto assets, including stablecoins, highlighting their potential adverse impact on the macroeconomic and financial stability of the country.

The RBI's warning, made in its latest Financial Stability Report (FSR), outlines the risks posed by excessive crypto adoption, which could undermine various facets of economic management.

What Impact does Crypto Assets pose on Monetary Policy and Fiscal Risks?

The RBI pointed out that excessive use of crypto assets could reduce the effectiveness of monetary policy. It stressed that these assets, by bypassing conventional financial channels, could worsen fiscal risks and circumvent capital flow management measures. 

Moreover, the shift of resources into cryptocurrencies could divert funds from financing the real economy, posing a threat to national economic stability. The report also pointed to the broader risk to global financial stability.

“Even though the size of crypto-asset markets remains small, their continued growth and increasing linkages with the traditional financial system could pose systemic risks. Stablecoins also present potential run risks,” the RBI said, citing the International Monetary Fund - Financial Stability Board (IMF-FSB) synthesis paper on policies for crypto assets.

Surge in Crypto Prices and Stablecoin Growth

The warning comes at a time when prices of virtual digital assets (VDAs), such as Bitcoin, have reached unprecedented highs. Bitcoin's price surged to over $100,000 this month, touching an all-time high of $108,316. 

The sharp increase in Bitcoin’s price has led to a rise in the market capitalisation of stablecoins, which facilitate lending, borrowing, and trading of digital assets.

Stablecoins, a type of cryptocurrency designed to maintain a stable value by being pegged to a reserve asset like the US dollar, have gained increasing prominence in the crypto market.

How does risks from Tokenisation stand in the picture?

The RBI also raised concerns over Distributed Ledger Technology (DLT)-based tokenisation, which has the potential to expose the financial system to vulnerabilities such as liquidity and maturity mismatches, leverage, asset price volatility, and operational fragilities. 

Tokenisation involves creating digital representations (tokens) of real-world assets such as bank deposits, money market funds, repos, and government securities, using DLT.

“Given that it is still in its infancy, financial stability concerns of tokenisation of assets are currently limited. Nonetheless, it has the potential to deepen the interconnectedness between the traditional financial system and the decentralised financial (DeFi) system,” the RBI noted.

In India, the popularity of crypto assets continues to rise, with homegrown crypto exchanges such as CoinDCX and CoinSwitch boasting large user bases of 16 million and 20 million, respectively. 

Despite the growing adoption of crypto assets in the country, the RBI’s warning underscores the need for caution and regulatory oversight to safeguard economic and financial stability.