The Indian central bank digital currency (CBDCs) may be able to provide the public with uses that private virtual currencies can provide, without the associated risks, and that is the key motivation for its issuance, said the Reserve Bank of India (RBI) in a concept note issued on CBDCs on Friday.
While building the case for the issuance of CBDCs, RBI came down heavily on cryptocurrencies. “The rapid mushrooming of private cryptocurrencies in the last few years has attempted to challenge the fundamental notion of money as we know it,” the central bank said.
RBI said that these private cryptocurrencies claim the benefit of decentralisation and are being seen as an innovation which could result in growth of decentralised finance (DeFi), thereby disrupting traditional financial systems.
RBI added that private virtual currencies are not commodities or claims on commodities as “they have no intrinsic value.”
It further said that private cryptocurrencies are inherently designed in such a way that they could bypass the established and regulated intermediation and control arrangements that play a crucial role of ensuring the integrity and stability of the monetary and financial ecosystem of any nation.
“A wider proliferation of cryptocurrencies has the potential to diminish monetary authorities’ potential to determine and regulate monetary policy and the monetary system of the country which could pose a serious challenge to the stability of the financial system of the country,” said RBI.
CBDCs, on the other hand, will provide the public with benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies.
“As the custodian of monetary policy framework and with the mandate to ensure financial stability in the country”, RBI has consistently highlighted the associated risks with various types of cryptocurrencies and warned investors against it.
At a Mumbai event in June this year, RBI Governor Shaktikanta Das said cryptocurrencies pose huge financial stability risks in the economy.
“We have already conveyed our stance (on cryptocurrencies) to the government. They pose huge risks to financial stability,” Das was quoted as saying at the event by the media. Earlier, in May, he repeatedly cautioned investors amid the crypto market meltdown witnessed earlier this year.
Even RBI Deputy Governor T Rabi Sankar has cautioned against the use of private virtual currencies in the past. In April, he compared cryptocurrencies with Dutch White Tulip, a reference to a market bubble, and said that cryptos are worse.
He also said that stablecoins present a bigger threat to the economic stability of India than other cryptocurrencies.