India: Cryptocurrencies Will Seriously Undermine RBI’s Capacity to Determine Monetary Policy

Updated on May 16, 2022 at 3:35 pm UTC by · 3 mins read

The RBI’s concerns mostly revolve around money laundering and crypto-sponsored terrorism.

The Reserve Bank of India, popularly known as the RBI, has raised a red flag on the effects of cryptocurrencies in the country. This is according to RBI’s top officials including the governor, Shaktikanta Das, who briefed the Parliamentary Standing Committee. According to the RBI, cryptocurrencies can lead to the dollarisation of the economy. Furthermore, most of the crypto assets are denominated in USD.

“Almost all cryptocurrencies are dollar-denominated and issued by foreign private entities, it may eventually lead to dollarization of a part of our economy which will be against the country’s sovereign interest,” the officials told the members.

Indeed, the Indian population is adopting cryptocurrencies at a fast rate amid rising inflation globally. Thereby making the RBI officials uncomfortable in its future ability to control the economy.

“It (cryptocurrencies) will seriously undermine the RBI’s capacity to determine monetary policy and regulate the monetary system of the country,” a member of the panel quoted RBI officials.

The RBI feels threatened by the rise of crypto use in daily activities, in addition to the United States dollar. Moreover, the USD / Indian Rupee is at an all-time high according to metrics provided by TradingView.

Cryptocurrencies Adoption in India

A vast Indian population, mostly those operating online businesses, has been using crypto assets to transact value. Moreover, cryptocurrencies offer customers a cheaper, faster, and more secure means of transacting. Thereby attracting more users seeking both investment and fast transactions.

The RBI has been complaining about private cryptocurrencies for the past few years. At one time, the RBI had proposed a complete ban on crypto trading, which was later reverted by the highest court of the land.

Notably, India has one of the highest populations in the world, mostly the young generation. Of note, research has shown that most of the crypto retail users are the young generation seeking enormous returns. Additionally, most of the crypto firms including Binance have directly invested in India.

RBI Fears Dollarisation by Crypto Assets

With the high rate of crypto adoption in India, the RBI is indeed afraid of dollarisation in the country. Ideally, the RBI wants to retain its control regardless of crypto adoption. Already, some countries in the world led by El Salvador have experienced dollarisation at the state level.

Notably, the RBI’s concerns mostly revolve around money laundering and crypto-sponsored terrorism. Other than the dollarisation effect of crypto assets in India, the RBI seeks to protect investors from sophisticated algorithmic errors, such as that reported in the Terra Luna ecosystem among others.

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