After assuming the G20 presidency, India released its report on financial stability on Thursday, December 29. It calls for a global regulatory framework for bitcoin and crypto-currencies, which could include the possibility of banning “unsupported” crypto-currencies and decentralized finance (DeFi).
In the report, the Reserve Bank of India (RBI) notes that while the crypto-currency market is volatile, it has not posed a major risk to the formal financial system. However, the regulator warns that “accumulated experience suggests that crypto-currencies form an unstable ecosystem and that there is growing evidence that they are highly concentrated and interconnected“.
“To manage potential future risks to financial stability, and protect consumers and investors, it is important to reach a common approach to crypto-assets“, says the RBI.
In the report, the RBI identifies three regulatory options for crypto-currencies, based on what has been established in different countries. A first option is to apply the same regulatory principles to crypto-currencies as those in place for traditional financial intermediaries, the regulator says.
The second alternative presented is much more radical. “Ban crypto-currencies because their real-life use cases are minimal,” the report says. Regarding this option, the paper warns that there is a challenge arising from the different legal systems and individual rights of different countries, compared to the powers of the state. The challenge comes from the different treatments of crypto-currencies that are envisaged in the regulatory frameworks in place in different countries.
Finally, a third path is mentioned, that of letting “implode“the crypto-currency ecosystem. To do this, we would have to make the ecosystem “Systematically irrelevant, as the underlying instability and risks will prevent the industry from growing“, the RBI states.
As for leaving crypto-currencies to their own devices, the report notes that there are risks to this option as they could become more integrated with traditional finance and attract more funding, leading to a more noticeable effect on the economy.
FTX’s collapse and subsequent heavy selling has highlighted the inherent vulnerabilities of crypto-currencies, says India’s central bank. The RBI also mentions the temporary suspension of withdrawals on Binance, as well as the collapses of Celsius and Terra USD/Moon this year, and the bankruptcy filing of Three Arrows Capital.