Backing cryptocurrencies is not an option because it would jeopardise the rupee's position as a currency and limit authorities' ability to control the money supply, according to Reserve Bank of India (RBI) deputy governor T Rabi Sankar.
“Every private currency will eventually replace the rupee to some extent. Consequently, the role of the rupee as a currency will be undermined. With one or more private currencies being allowed, there would be parallel currency system(s) in the country. Thus, increased acceptance of cryptocurrencies would result in effective ‘Dollarization’ of our economy,” Sankar said, according to a copy of his speech at an industry event. Dollarisation is a phenomenon in which the US dollar is used in addition to or instead of a country's indigenous currency.
According to Sankar, such a development would jeopardise authorities' ability to manage the money supply and interest rates because the monetary policy would have no effect on non-rupee currencies or payment instruments. “When that happens, India loses not just its currency, a defining feature of its sovereignty, but its policy control of the economy. With loss of traction for monetary policy, the ability to control inflation would be materially weakened.”
If private currencies are allowed, the banking system's ability to mobilise rupee deposits, and so create credit, will be harmed, according to the deputy governor. The generation of credit in convertible currencies would be unaffected by monetary policy. According to Sankar, if a significant portion of deposits and credit shifts to cryptocurrencies, the result will be a weakened, even disintegrating banking sector, jeopardising financial stability.
According to Sankar, there are already signs that private cross-border cryptocurrency flows are taking place. “If this trend is legitimised, a part of the flows related to trade payments, personal remittances or cross border investments would be made in these cryptocurrencies. As they are non-reserve currencies, this could have adverse implications for India’s foreign exchange reserves, which lend stability to the external sector,” he said.
Furthermore, such cryptocurrency payments are not subject to capital account laws. The integrity of the capital account regime would be jeopardised as policy control over capital flows would be lost. The impact on foreign exchange reserve accumulation and exchange rate management, according to Sankar, creates major macroeconomic stability concerns.
“We should in fact be more concerned about stablecoins because they would be more effective as currency than volatile cryptocurrencies,” he said in response to the argument that stablecoins are safer than other cryptos because they are pegged to specific assets.
India must be more circumspect in its approach to cryptocurrencies than advanced economies (AEs) as India is not similarly placed as AEs, Sankar said. “We should particularly be alert to the possibility that these private currencies can be used for global strategic control. If, for example, some private currency substantially replaces the rupee, the corporate which manages that cryptocurrency (or the country which has control of that corporate) can practically control India’s economic policy,” he added.
Sankar said that it is not even feasible to allow crypto investments as a store of value rather than as a medium of exchange. “‘Store of value’ demand is a more substantial source of demand for a currency than transaction demand. One only needs to compare the volume of time deposits with transactional deposits to understand this,” he said.
The same difficulties exist when a cryptocurrency is utilised as a store of value. Furthermore, unlike the rupee's value, which is anchored by monetary policy and its status as legal currency, the value of crypto assets is completely based on the anticipation that others will value and utilise them as well. “Since valuation is largely based on beliefs that are not well anchored, it is bound to have a de-stabilising effect on the monetary and fiscal stability of a country, even while it is not permitted to operate as a legal tender,” Sankar said.
Cryptocurrencies are not money, financial assets, real estate, or digital assets. As a result, no financial sector authority can regulate it, according to the deputy governor, “It is not possible to regulate something that one cannot define.”