India’s central bank has released its latest annual report which includes a section dedicated to cryptocurrency. The Reserve Bank of India outlines the risks posed by crypto and emphasizes the need to monitor crypto development in anticipation that some trading may shift from exchanges to peer-to-peer (P2P) mode.
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Risks to Monetary Policy
The Reserve Bank of India, the country’s central bank, published on Wednesday its 268-page annual report for 2017-18.
While asserting that “the cryptocurrency eco-system may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy,” the central bank wrote:
Though cryptocurrency may not currently pose systemic risks, its increasing popularity leading to price bubbles raises serious concerns for consumer and investor protection, and market integrity.
A Shift to Peer-to-Peer
The annual report also confirms that the government and the central bank “are keeping a close watch on cryptocurrency.”
Referring to the circular it issued in April banning all financial institutions from providing services to “any individual or business entities dealing with or settling in virtual currencies,” RBI reiterated:
Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased usage of cash. Possibilities of migration of crypto exchange houses to dark pools/cash and to offshore locations…require close watch.
Since the RBI ban, crypto exchanges in India have come up with solutions to continue providing Indian rupee deposit and withdrawal services to their customers. One solution that is growing in popularity is through exchange-escrowed P2P trading.
RBI Sees Additional Risks
RBI claims that cryptocurrencies are “prone to hacking and operational risk” because they are stored in electronic wallets. In addition, the central bank sees “a high possibility of its usage for illicit activities, including tax avoidance.”
Emphasizing that crypto lacks an “established framework for recourse to customer problems/ dispute resolution as payments by cryptocurrencies take place on a peer-to-peer basis without an authorised central agency which regulates such payments,” RBI detailed:
The absence of information on counterparties in such peer-to-peer anonymous/pseudonymous systems could subject users to unintentional breaches of anti-money laundering laws (AML) as well as laws for combating the financing of terrorism (CFT).
Furthermore, the report mentions that a number of central banks around the world are exploring central bank digital currencies. “In India, an inter-departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency,” the report reads.
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Images courtesy of Shutterstock and RBI.
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