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RBI lists out Risks and Challenges of Cryptocurrency, again.

“Today, the Reserve Bank of India released its Annual Report for 2017-18, a statutory report of its Central Board of Directors.” reads the RBI Press release.

The RBI Annual report of date June 30, 2018, was sent to the central government on August 24 and shared on the RBI website today. It is a report from the central board of directors about the Reserve bank’s year 2017-18. The report shares data on how RBI performed, what are the policies, the economic review, etc. Interestingly, the report also dedicated a section to Cryptocurrencies. 

Cryptocurrency: Economic Challenges

The annual report dives into cryptocurrency after briefly stating what must have garnered massive interest of public into the space. 

The public disenchantment from lower returns from bank deposits coupled with sobering down of returns from other assets was followed by an interesting development. Cryptocurrencies came under focus globally as an alternative source of high returns albeit with a high risk element.

Reserve Bank of India, Annual Report, 2017-18

The Negatives of Cryptocurrency according to RBI

In the Box about cryptocurrency, RBI explains what cryptocurrency is, how they are created and distributed in an ICO with no intrinsic value and how they are highly volatile. These are not the only negatives, RBI had few more up their sleeves

  1. Its value is driven by users’ confidence in it. This, coupled with limited supply, makes its value highly volatile and, therefore, not a reliable medium of exchange or store of value.
  2. Its(Cryptocurrency) increasing popularity leading to price bubbles raises serious concerns for consumer and investor protection, and market integrity.
  3. 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.
  4. There exists a high possibility of its usage for illicit activities, including tax avoidance.
  5. 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) (Source: https://www.bis.org/cpmi/publ/d137.pdf)
  6. The Financial Action Task Force (FATF) has also observed that cryptoassets are being used for money laundering and terrorist financing.

The Positive Side of Cryptocurrency

Within the same report, the RBI never really acknowledges the power of cryptocurrency and I am not entirely sure if they should. Given that, their job is to detract people from crypto adoption, they will never share the benefits such as easy and cheap cross-border payments, transparency, accountability, immutability and so on. 

Nevertheless there were few positives in the negatives, if you interpret them well. 

  1. The cryptocurrency eco-system may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy. Translation: Crypto can kill Banks
  2. The SEC and the CFTC have emerged as the primary regulators of cryptocurrencies in the United States, where these assets like most other jurisdictions, do not enjoy the legal tender status. Translation: US, the biggest capitalist country is regulating Cryptocurrency.
  3. In September 2017, Japan approved transactions by its exchanges in cryptocurrencies. Missing: Bitcoin is a legal tender in Japan. 

Risk of RBI’s Banking Ban

At the end of the report, it says 

Developments on this (Banking ban) 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, thus raising concerns on AML/CFT and taxation issues, require close watch.

Reserve Bank of India, Annual Report, 2017-18

Translation: After the banking ban, Traders will trade P2P with Cash, which can easily lead to Money laundering and Tax evasion. Exchanges will just move to crypto friendly countries. They need to be monitored. 

Guess what RBI, they didn’t. Majority of the exchanges in India stood their ground, developed around the ring fencing and gave bold new innovative solutions to their traders. All because they want to work in India, serve Indians.

If only, RBI had advised the exchanges on AML and KYC guidelines, demanded red flagging unusual transactions, and given them regulatory protection, majority of the traders would not have to deal with cryptocurrency by Peer to peer trading and expose themselves to the above mentioned risks. 

Further Reading:

 A Brief history of RBI’s Research on Cryptocurrency and Blockchain

Is RBI Justified in their Decision of Banking Ban?

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