RBI Governor Warns Cryptocurrency Threatens Financial Stability; Emphasizes Need for International Consensus, India Leads the Discussion

Cryptocurrency poses a major risk to financial stability and monetary stability. This statement was made by Reserve Bank of India Governor Shaktikanta Das at an event organized by the Peterson Institute for International Economics on Friday.

He stated, “I truly express the opinion that this is something that should not be allowed to dominate the financial system. It poses a risk to the banking system. It can also create a situation where the central bank may lose control over the money supply in the economy.”

If the central bank loses control over the money supply in the economy, how will it monitor the liquidity available in the banking system? How can the central bank control inflation by either reducing the money supply during a crisis or losing the money supply? That is why we see cryptocurrencies as a significant risk.

Cryptocurrency: A Global Concern for Central Banks

Shaktikanta Das stated that there should be international consensus on cryptocurrency, as transactions are cross-country. Individuals should be fully aware of the significant risks associated with it.

“I don’t think it should be promoted. As a protector of financial stability, it is a major concern for central banks worldwide. Governments are also becoming increasingly aware of the potential risks posed by cryptocurrencies.”

India: The First Country to Raise Concerns About Cryptocurrency

Das stated that India was the first country to raise questions about cryptocurrency. Under India’s presidency in the G-20, an agreement was reached to develop an international understanding on how to deal with the crypto ecosystem. He mentioned that some progress has been made in this regard.

He said, “I believe there is still more work to be done. From India’s perspective, in the context of the Reserve Bank, I think we are among the first central banks to express our serious concerns about cryptocurrency very clearly.”

Understanding the Emergence of Cryptocurrency to Bypass the System

The RBI Governor stated that the first step is to understand the origins of cryptocurrency. It has emerged to bypass the system. Cryptocurrency possesses all the characteristics of money. The fundamental question is whether we, as authorities, are comfortable with publicly issued cryptocurrency.

The major question is whether we are comfortable with crypto, which has the characteristics of currency, or if we are satisfied with having a parallel private currency system alongside fiat currency. Clearly, if a certain part of your economy separates itself and is dominated by crypto assets or private cryptocurrencies, the central bank loses control over the entire monetary system.

This will lead to significant instability in the monetary system. It can also cause considerable volatility in the financial sector. There are substantial risks involved, so we are clarifying that we must address this very carefully.

What is Cryptocurrency?

Cryptocurrency is a type of virtual currency, also referred to as digital currency. Like currencies such as the dollar or rupee, cryptocurrency can be used for transactions.

Bitcoin is the most popular cryptocurrency among them. Each Bitcoin transaction is recorded in a public ledger through blockchain, which is a decentralized record maintenance system managed by different users.

History of Cryptocurrency

In 1983, American cryptographer David Chaum created the first cryptographic electronic money known as eCash. It was implemented by DigiCash in 1995. This first form of cryptographic electronic money required software to withdraw currency from the bank in the form of notes. The software was fully encrypted. Through this software, the recipient of the cryptographic electronic money was provided with an encrypted key, which was a special type of key.

Using this software, the issuing bank, government, or other third parties could not track the transactions. In 1996, the U.S. National Security Agency published a paper describing a cryptocurrency system. In 2009, a virtual creator named Satoshi Nakamoto developed a cryptocurrency called Bitcoin. It was only after this that cryptocurrency became known worldwide.