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India’s Dilemma With Cryptocurrencies

India’s Reserve Bank‘s stance on cryptocurrencies is being put to a test at the moment. As a potential huge market for cryptocurrencies, the bank had in April barred its regulated entities from dealing bitcoin-like cryptocurrencies but it recently set up an inter-departmental group to study and provide guidance on the feasibility of introducing a central bank digital currency.

As confirmed in its annual report released on Aug. 29, the bank considered looking into the idea based on factors that “have led central banks around the world to explore the option of introducing fiat digital currencies.” It cites “rapid changes in the landscape of the payments industry, along with factors such as emergence of private digital tokens and the rising costs of managing fiat paper/metallic money” as the main factors.

RBI’s problems with cryptos
The bank says cryptocurrencies are not posing any systemic risks at the moment. However, its problem is their increasing popularity which leads to price bubbles that can affect consumer and investor protection and market integrity. it says:

“The cryptocurrency eco-system may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy. Furthermore, being stored in digital/electronic media – electronic wallets – it is prone to hacking and operational risk, a few instances of which have already been observed globally.”

It criticises the absence of an “established framework for recourse to customer problems/disputes resolution” and the “high possibility of its usage for illicit activities, including tax avoidance” as well as lack of information on counterparties which could lead users to unintentional breaches of anti-money laundering (AML) combating the financing of terrorism (CFT) laws.

RBI’s Dilemma
The bank is stuck between the regulatory responses to cryptocurrency globally. From African countries’ ‘wait and see approach’ to the US Securities and Exchange Commission (SEC) continuous investigations into cryptocurrencies to Asian countries like China which recently banned several crypto-related activities as well as Japan and South Korea which account for the biggest shares of crypto asset markets in the world.

With the likes of Japan having approved exchanges in cryptocurrencies, India’s RBI is left to keep a watch on cryptocurrencies especially as it fears “some trading may shift from exchanges to peer-to-peer mode, which may also involve increased usage of cash” and “possibilities of migration of crypto exchange houses to dark pools/cash and to offshore locations, thus raising concerns on AML/CFT and taxation issues.” Like it is the case in several other countries, the bank is also interested in the adoption of the underlying blockchain in the domain of payment, clearing and settlement solutions.

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