RBI issues Crypto risk warning: will it impact crypto investments?

In a rather terse warning, the RBI government has underlined in no uncertain terms that Cryptocurrencies were a clear danger. According to the RBI governor, anything that derives value based on make-believe, without underlying strength or fundamentals, is speculation. Das added that while the crypto markets were nowhere close to the banking system or the capital market system, they were becoming big and could post a major systemic risk to the stability of the financial markets in the medium to long run.

These thoughts were contained  in the foreword to the RBI Financial Stability Report (FSR) dated 30th June 2022. The central bank also stressed on the need for further examination and critical evaluation of the crypto space and its possible impact on traditional financial institutions. He went to the extent of highlighting that Cryptocurrencies are not currencies as they do not have an issuer. They also do not have an intrinsic value so it is nothing short of a speculative asset class based on make-believe. 

Money laundering is a major concern in crypto currencies

Cryptocurrencies could result in “dollarisation” of the economy and impair financial stability. RBI underlined that such digital assets could undermine the sovereign control over money supply and impact the exchange rate management. Das has also highlighted that since there is no issuer and no proper audit trail, crypto currencies can be easily used to flush money rapidly out of any economy. That is why cryptos have gained so much of usage in the world among the seedier elements as the levels of controls are limited.

Talking about crypto assets, the RBI report highlighted that apart from the liquidity mismatch risk, there were also other credit and operational risks, lack of regulatory oversight etc. all these made these cryptos dangerous asset classes. It also been extremely volatile in the sense that the crypto assets grew tenfold between early 2020 and late 2021, peaking close to $3 Tn. Since then, the value has seen a sharp decline from a peak level of $3 trillion to the current value of just about $1 trillion.