Reserve Bank of India looking to heavily regulate crypto

The report was laced with positivity despite the negative macroeconomic trends that threatened the global financial systems. RBI’s report said that the Indian economy and domestic financial system remain resilient in the face of strong global headwinds.

When it comes to virtual currencies, the RBI expressed scepticism over the future of the asset class and the risk that they pose to the broader financial industry. The report cited the catastrophes that plagued digital assets from the collapse of Terra, FTX, and the streak of top projects halting withdrawals for users.

India’s central bank noted that the only way to mitigate the risks posed by the volatile asset class is using a common approach to regulation. The report suggested the use of the ‘same-risk-same-regulatory-outcome’ principle which would see the virtual currency service providers being regulated in the same manner as banks.

The digital currency problem

The RBI’s recommendations become grimmer as the report goes on, with the central bank suggesting a total ban of the entire asset class opinionizing that their real-life use cases are next to negligible. It is unclear how the banking regulator hopes to achieve a global blanket ban given the use of distributed ledger technology (DLT).

As the bank sees it, a third option is to let it implode and make it systemically irrelevant as the underlying instability and riskiness will ultimately prevent the sector from growing. The bank confirmed that the third option posed the biggest risk to the financial sector because there is a high chance that virtual currencies might become extremely interconnected with mainstream finance. At the moment, the RBI believes that both sectors exist independently as the spill over from Terra and FTX was minimal in mainstream finance.

Proposed solution

The RBI maintains that the best route out of the digital asset debacle is through a concerted effort at a common regulation by countries. A staccato approach to regulation would create loopholes that would give birth to regulatory arbitrage which the RBI terms a recipe for failure.