Crypto Has 'Consequences' - RBI Warns In Financial Stability Report, December 2024

The Reserve Bank of India in its Financial Stability Report said that there are consequences of investing in crypto currency assets on Tuesday.

"Crypto-assets' price swung wildly and the rally, which faded during March-September 2024, was boosted subsequently, especially after the US election outcome," the central bank said in its report.

Earlier this year, crypto currency saw a major boom as investors started taking a keen interest in investing in crypto currency, post the election of Donald Trump as the next President of the United States.

Whatever prior indecision there was in the markets around bitcoin and crypto currency was dispelled once Trump started not just accepting donations for his election campaign in cryptocurrency, but also made investments.

This not just bolstered investor sentiments but also tangibly increased investment in crypto assets.

Widespread usage of crypto-assets such as stablecoins, however, has consequences for macroeconomic and financial stability, according to the RBI report.

"As highlighted in the IMF-FSB synthesis paper, it could reduce the effectiveness of monetary policy, worsen fiscal risks, circumvent capital flow management measures, divert resources available for financing the real economy and threaten global financial stability," the RBI report noted.

Earlier in December, the price of bitcoin crossed the $100,000 mark, reaching an all-time high of $108,316 almost two weeks later. Within this year, the surge in bitcoin price has more than doubled.

Consequently, there is an increased market capitalisation of stablecoins that allow investors to lend, borrow and trade other digital assets.

What Are Stablecoins?

Stablecoins are a certain type of crypto currency whose value is attached to another asset, like a fiat currency or gold, allowing them to maintain a stable price.

Why Are They Risky?

According to the report, stablecoins pose potential run risks because even though the size of the crypto-asset market is small, their continued growth and increasing linkages with the traditional financial system could pose systematic risks, like tokenisation.

Tokenisation is a process through which digital representations called tokens are created. These tokens represent real-world assets like bank deposits, money market funds' shares, government securities, etc. They are created using DLT.

The RBI also expressed concerns regarding DLT-based tokenisation and remains cautious as the sector expands, constantly emphasising on the importance of robust regularisation to ensure financial stability.