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RBI ex-Guv Subbarao explains why RBI is anxious about cryptocurrency

MUMBAI: The Reserve Bank of India (RBI) has stated multiple times that it has “serious” and “major” concerns about cryptocurrencies without ever explaining what those concerns could be. The central bank’s aversion to virtual currencies is seen as one of the primary motivations behind the government’s bill to ban all private cryptocurrencies.

The crypto industry believes the central bank is looking at cryptocurrencies through a narrow lens and is failing to appreciate the various use cases for such virtual currencies. The industry’s argument is that cryptocurrencies are a digital asset, and not a threat to the monetary sovereignty of the rupee.

While concerns that cryptocurrencies can facilitate money laundering and terror financing are being expressed globally, RBI, on its part, has shied away from explaining its key concerns in detail, leaving the crypto industry scratching its head.

In an interview with, former RBI Governor Dr D Subbarao said RBI’s concerns over cryptocurrencies like Bitcoin are three-fold.

Monetary Stability

RBI is the sole manager of currency in the economy and is responsible for the upkeep of the monetary system. Subbarao believes if virtual currencies gained traction, then it could threaten the monetary stability, as “it is quite possible that domestic price formation could be set in that virtual currency.”

Financial Stability

For Subbarao, the threat to the financial stability of the Indian economy from cryptocurrencies like Bitcoin is simple. “If regulated institutions, banks for example, are exposed to virtual currencies and if that currency is very volatile, then there could be financial instability,” Subbarao said.

The former finance secretary believes the threat to financial stability is particularly large from virtual currencies that do not have an intrinsic value and are backed by just algorithms, like Bitcoin and Ethereum.

Capital Outflow

Interestingly, Subbarao sees virtual currencies such as Bitcoin as a threat to the stability of the external sector of India. “Cryptocurrencies could become a conduit for capital flight, especially in a country like India where there is still no full convertibility of capital,” the former governor said.

In that light, Subbarao sees the efforts of central banks to create their own central bank digital currencies (CBDC) as a defensive mechanism. A central bank digital currency is a virtual version of the sovereign currency of the country and is issued by the central bank. This is different from private cryptocurrencies like Bitcoin, which is issued by private citizens.

Subbarao, who helmed the central bank during Global Financial Crisis as well as the infamous ‘taper tantrum’ period of 2013-14, is of the view that Facebook’s plans to launch a stablecoin back in 2016 (Libra) was the turning from when central banks saw cryptocurrencies as an assault to their sovereignty.

The former governor, who currently resides in Singapore, believes RBI’s primary motivation to launch a central bank digital currency is to not be left behind. “Main motivation is to ensure that it is not left behind in a world where CBDCs might become very ubiquitous,” Subbarao said.

CBDCs could also help the central bank reduce the high costs that it bears in printing and maintaining currency in circulation. However, in an economy where payment systems have already become very penetrative and virtual wallets are growing every minute, Subbarao sees little incentive for individuals to move away from private cryptocurrencies.

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