Union Finance Minister Nirmala Sitharaman stated on Monday that the Reserve Bank of India (RBI) is in favour of prohibiting cryptocurrencies due to their destabilising effect on monetary and fiscal stability.
“In view of the concerns expressed by RBI on the destabilising effect of cryptocurrencies on the monetary and fiscal stability of a country, RBI has recommended for framing of legislation on this sector. RBI is of the view that cryptocurrencies should be prohibited,” she told the Lok Sabha in a written reply to a query on this matter.
The finance minister added that effective legislation on this matter is possible only through international collaboration. “Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards,” she said.
Currently, cryptocurrencies are unregulated in India, and the government is consulting on legislation to regulate them. The RBI has been wary of cryptocurrencies due to their cryptic nature and lack of intrinsic value. A slew of so-called crypto exchanges haven’t helped the cause of cryptocurrencies in India, with many doing business online and soliciting customers through mass media advertising promising superlative returns — a strategy that has helped them rapidly grow their business, even across small towns. The recent crypto crash has served as a wake-up call to customers, at least some of whom did not fully comprehend crypto currencies and saw them as instruments with high potential returns.
“RBI has been cautioning users, holders and traders of Virtual Currencies (VCs) vide public notices on December 24, 2013, February 01, 2017 and December 05, 2017 that dealing in VCs is associated with potential economic, financial, operational, legal, customer protection and security related risks,” Sitharaman said.
RBI had also issued a circular in April 6, 2018 prohibiting its regulated entities from dealing in virtual currencies (VCs) or provide services for facilitating any person or entity in dealing with or settling VCs, she said. “The said circular has been set aside by the Hon’ble Supreme Court on March 04, 2020,” she added.
RBI on May 31, 2021 also advised its regulated entities, such as banks to continue to carry out customer due diligence processes for transactions in VCs, in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT), and obligations under Prevention of Money Laundering Act (PMLA), 2002. This was in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.
The central bank also expressed concern about the negative impact of cryptocurrency on the economy, she added. “The RBI stated that cryptocurrencies are not currencies because every modern currency must be issued by the Central Bank / Government.” Furthermore, the value of fiat currencies is anchored by monetary policy and their legal tender status, whereas the value of cryptocurrencies is solely based on speculation and expectations of high returns, which are not well anchored, so it will have a destabilising effect on a country’s monetary and fiscal stability,” she said.
In her February budget speech, the finance minister stated that the central bank would soon issue its own digital currency.