Crypto poses risks to India’s financial stability: RBI

Cryptocurrencies, including stablecoins, pose significant risks to financial stability, according to the Reserve Bank of India.

Reiterating its long-held anti-crypto stance, the RBI highlighted the various risks involved with digital assets in its Dec. 30 Financial Stability Report for 2024.

While crypto adoption flourished at the grassroots level in India this year, the RBI raised a red flag, warning that unchecked use of digital assets, including stablecoins, could loosen monetary reins, open backdoors for capital flight, and “divert resources available for financing the real economy.”

According to the regulator, while the crypto market in India “remains small,” the narrowing gap between decentralized and traditional finance could pose systemic risks, with stablecoins carrying the added danger of potential run risks.

Citing the International Monetary Fund – Financial Stability Board report, the RBI added that stablecoin issuers are becoming significant holders of mainstream financial assets, such as government securities and other collateral, raising concerns about their impact on economic stability.

Stablecoins also pose unique challenges, particularly in emerging markets where “country-specific macroeconomic and demographic factors” have led to increased usage, the report stated, adding:

“These developments can undermine the effectiveness of monetary policy, circumvent capital controls, strain fiscal resources, and threaten financial stability.”

Over the years, India’s central bank has pushed central bank digital currencies as a more reliable alternative to stablecoins. During the G30 39th Annual International Banking Seminar in October, RBI governor Shaktikanta Das labeled stablecoins as private money, which could undermine government sovereignty by allowing private issuers to dominate the payments market.

Tokenization is another area that concerns the RBI due to the sector’s potential to “deepen the interconnectedness between the traditional financial system and the decentralized financial system.”

Although the market for tokenization remains in its early stages, the RBI is worried about the risks it could introduce, including “liquidity and maturity mismatches,” excessive borrowing or debt built on tokenized assets, “asset price and quality risks,” and “operational fragilities.”

The report stressed that these vulnerabilities could spill over into the broader financial system, amplifying systemic risks. 

The RBI’s warning comes as India’s cryptocurrency sector continues to drift in regulatory limbo. Despite calls for regularity clarity, the government recently admitted that there is “no fixed timeline” for introducing a comprehensive regulatory framework for virtual assets.

Meanwhile, India’s crypto market remains burdened by a tax regime seen as overly harsh, with a 30% capital gains tax, a 1% TDS on every transaction, and no provision to offset losses. 

According to a recent report, this is triggering capital flight, yielding considerable revenue losses for both the government in the form of uncollected taxes and domestic crypto service providers due to declining trading activity as traders shift to offshore exchanges.