RBI warns to move with caution on cryptocurrencies

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Cryptocurrency might be a revolutionary technology in the economic sphere, but its impact cannot be deciphered yet.

Shaktikanta Das, the Governor of RBI, has released a statement stating the need for more debates and discussions on cryptocurrencies before they can be adopted.

As the mandate of ensuring financial stability is in the hands of a nation’s central bank, they should have the last word over it.

Whatever form cryptocurrency take in India, there could be a negative impact on a nation’s monetary policies, especially in fiscal stability and currency.

But an outright ban would deny the nation and citizens from accessing a promising technology. It could also increase its presence in the illegal market.

As of now, a quarter of the Bitcoin users belong to the black market, whose online versions are called Darknet markets.

If the government enforces a ban on cryptocurrency, then it would thrive in the black market. What is needed is a regulated ecosystem where these assets could control and not end up in illegal activities that have given it an infamous reputation.

The RBI is the best place that can regulate cryptocurrency and stop its misuse. Some argue in favour of such risks the asset brings up, saying that risk is an inherent part of the investment environment.

Those who oppose that viewpoint say that cryptocurrency is a new matter and, its overall impact is little understood. The RBI seems to take a middle path between the two opinions.

As of now, there is no immediate demand to promote it as a digital currency. Though, media reports are stating that there is a government plan to legalise crypto trading on exchanges as assets.

According to Professor Eswar Prasad of Cornell University, even though Bitcoin has become mainstream, it hasn’t delivered its promise as a medium of exchange. Its prices are volatile, unstable, slow, expensive, and cumbersome.

But paradoxically, it has become an asset. Investors are investing in it in the hope that the value will rise. In that case, Prof. Prasad wonders the source of its value. Experts believe that its value comes from scarcity rather than being a medium of exchange.

He warns to not believe in such rarity-caused value. He says that people are always attracted to new technology and invest in it. Examples are the industrial revolution and the dot com bubble. The beneficiaries would be retail investors.

RBI’s concern is shared by central banks around the world, especially in its market-manipulative power. Some countries have accepted it.

There are also Stablecoins, which are backed by hard currencies. Its risk lies in the auditing and liquidity of the portfolio.

Another thing of concern is cross-border transactions, which is easier using cryptocurrencies. But it will also lead to money laundering. The decisions regarding the issue are expected to come up in the RBI report next month.

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