RBI's Crypto Warning | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Introduction

• RBI Governor Shaktikanta Das has said that, Cryptocurrencies are clear danger and anything that derives value based on make believe, without any underlying, is just speculation under a sophisticated name. RBI’s 25th Financial Stability Report released earlier this week says the growing threat of the crypto-assets ecosystem warrants drastic approaches by national authorities.
• The central bank also said that several vulnerabilities associated with the crypto asset markets have been highlighted such as linkages between crypto asset markets and the regulated financial system. In fact RBI has on several other occassions flagged concerns about cryptocurrencies, which are seen as a highly speculative asset. 
• In recent weeks, cryptocurrencies have witnessed massive volatility amid global uncertainties. Meanwhile the government is working to finalise a consultation paper on cryptocurrencies with inputs from various stakeholders and institutions, including the World Bank and the IMF.

Cryptocurrency

• It is a digital or virtual currency that uses cryptography for security.
• Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank.
• They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders. The most common cryptocurrencies are Bitcoin, Ethereum, Ripple, and Litecoin.
• Facebook has announced a digital currency called Libra that will roll out for use in 2020 and allow the platform’s billions of users across the globe to make financial transactions online.

Need for regulation

• Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused,and to protect unsuspecting investors from excessive market volatility and possible scams.
• However, regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
• India has not been able to tick these boxes, and we’re in danger of missing out in the global race altogether.

RBI against the use of cryptocurrencies

• Sovereign guarantee: Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.
• Market volatility: Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.
• Risk in security: A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
• Malware threats: In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
• Money laundering.

International Practice

• South Korea and the U.S. are intensifying regulatory scrutiny of the market.
• South Korea recently proposed legislation to either heavily regulate exchanges or ban them.
• In U.S., a court ordered a popular cryptocurrency platform to hand over information related to 14,000 accounts to the Internal Revenue Service Global tech firms such as IBM are developing their own cryptocurrency platforms for transactions in a secure and transparent manner.
• World’s top central bankers are preparing to issue their own Central Bank Digital Currency (CBDCs).
• Japan has recognised Bitcoin exchanges as legal.

Conclusion

• There is a need for more investor awareness on Cryptocurrencies
• India is currently on the cusp of the next phase of digital revolution and has the potential to channel its human capital, expertise and resources into this revolution, and emerge as one of the winners of this wave. All that is needed to do is to get the policymaking right.
• Blockchain and crypto assets will be an integral part of the Fourth Industrial Revolution, Indians shouldn’t be made to simply bypass it.
• RBI’s objective is to understand the magnitude of the impact trading in cryptos could have on financial markets, not to thwart the advent of new technologies nor choke innovation.
• To be sure, there is no immediate demand to give cryptocurrencies the status of a digital currency; in other words, they are not becoming legal tender.