Cryptocurrencies could affect the transmission of India’s monetary policy if some trading migrates from the traditional exchange-based route to the peer-to-peer (P2P) mode, says the Reserve Bank of India (RBI) in its annual report published Wednesday, Aug. 29.
The report features an entire section dedicated to the digital asset market, where the central bank emphasizes on the need to keep a close watch on cryptocurrencies in anticipation of their possible impact on the economy.
Opaque Trading Is a Cause of Concern
Despite coming off as bullish on the onset, the RBI annual report for 2017–2018 underlines everything that’s wrong with cryptocurrencies. It particularly focuses on how sudden “price bubbles” followed by a market slowdown can leave investors at risk. The central bank cites the example of the strong decline in Bitcoin price earlier this year to bring home its point. The report reads:
“Bitcoins lost nearly US$200 billion in market capitalization in about two months from the peak value in December 2017. As per the CoinMarketCap, the overall cryptocurrency market had nearly touched US$800 billion in January 2018.”
The report also stretches the importance of keeping track of the crypto market more so now than ever considering that many traders could switch to P2P transactions to get around regulatory roadblocks. It says:
“Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased use of cash.”
P2P trading deviates from the standardized trading practice facilitated by a centralized platform (in this case, crypto exchanges). The exchange takes a back seat in P2P transactions and confines its role to help the buyer and seller get in touch with one other. Traders can carry out the transaction by exchanging one virtual currency for another at agreed rates, thus avoiding detection by regulators.
Additional Risks from Crypto Trading
The report also talks about how some exchanges are moving abroad to countries considered friendlier for cryptocurrency businesses and how this could pose a new challenge for RBI’s campaign against money laundering, terror funding, and tax fraud.
It then goes on to underline how cryptocurrencies can leave a visible impact on India’s economic system. On a slightly bearish note, the report points out that their inherent dependence on electronic or digital media makes cryptocurrencies vulnerable to “operational risks” and “hacks.”
It also noted that in its present form, the cryptocurrency industry has no set recourse to address customer grievances and resolve disputes.
On a related note, there are reports that RBI may have secretly formed a new unit to focus exclusively on blockchain technology, cryptocurrencies, and artificial intelligence. The new unit, believed to be led by a chief general manager, is reportedly still in the experimental phase.