Another central bank has taken action! The Reserve Bank of India said it has begun studying the feasibility of central bank digital currency

The Reserve Bank of India released its annual report yesterday, which specifically mentioned cryptocurrencies. The report believes that cryptocurrencies may not pose systemic risks at present, but may affect the transmission of monetary policy by affecting the existing payment and settlement system.

The report also discussed some of the "side effects" of the previously effective cryptocurrency ban and said that the Reserve Bank of India has formed an inter-departmental group to explore the feasibility of introducing a central bank digital currency.

Cryptocurrencies may affect the transmission of monetary policy

The Reserve Bank of India (RBI) official website released its 2017-2018 annual report on the 29th.

The report mentioned that while cryptocurrencies may not pose a systemic risk at present, their growing popularity has led to price bubbles, which has raised serious concerns about consumer and investor protection and market integrity.

Regarding the nature of cryptocurrencies, consistent with the previous position of the Bank for International Settlements, the Reserve Bank of India also believes that cryptocurrencies cannot fully assume the various functions of currency:

Cryptocurrency generally has some characteristics of money, but it is not a liability of any entity and is not backed by any authority. Its value is driven by the confidence of users in it. This, combined with a limited supply, makes its value highly volatile and therefore not a reliable medium of exchange or store of value.

The report also noted that storing virtual currencies in digital or electronic media could make them vulnerable to “hacking attacks” and “operational risks.” It added that since cryptocurrency transactions are conducted on a peer-to-peer (P2P) basis, with no central authority regulating such transactions, there is no established framework for recourse to customer issues and dispute resolution.

While there are risks and challenges in the cryptocurrency space, it could affect the transmission of monetary policy. The RBI issued a warning in the report: “The cryptocurrency ecosystem may affect the existing payment and settlement systems, which in turn may affect the transmission of monetary policy.”

At the same time, due to the risk of crypto assets being used for illegal activities, as well as bubbles and Ponzi schemes in the field, policy responses are becoming increasingly necessary. In this regard, the report explains the need for the power to regulate such transactions and states that in peer-to-peer anonymous/pseudonymous systems, users may inadvertently violate anti-money laundering laws (AML) and laws against the financing of terrorism (CFT).

RBI sets up special group to study the feasibility of introducing central bank digital currency

The RBI has set up a special group to study the feasibility of introducing a central bank digital currency to address issues such as the rising cost of banknote management. The report said:

The rapid changes in the payment industry landscape, along with the emergence of private digital tokens and the rising costs of managing legal tender paper/metal currencies, have prompted central banks around the world to explore the option of introducing legal tender digital currencies. In India, the central bank has formed an inter-departmental group to study and provide guidance on the desirability and feasibility of introducing a central bank digital currency.

The report also revealed RBI’s relatively optimistic attitude towards blockchain technology (DLT: distributed ledger technology):

Unlike the focus on privately issued cryptocurrencies, the adoption of DLT in the payment, clearing and settlement sectors is expected to bring significant economic benefits in the future.

RBI concerned about 'side effects' of cryptocurrency ban

The Reserve Bank of India has always been one of the central banks with the strictest attitude towards cryptocurrencies. In early July this year, RBI's digital currency ban officially came into effect, prohibiting banks from providing services to digital currency exchanges.

However, in order to circumvent the RBI ban, Indian exchanges have stopped fiat-to-cryptocurrency services and turned to cryptocurrency trading. At the same time, Indian cryptocurrency traders have also begun to move to peer-to-peer trading platforms such as LocalBitcoins.

The "one-size-fits-all" approach of the Indian central bank has also sparked some discussions in the industry. As previously reported by BTC Manager, Jaideep Reddy, an Indian crypto market consultant, said that this policy will not produce the desired effect, but will instead drive the crypto economy underground and make the existing situation worse.

The Indian central bank’s research on relevant policies has also been questioned. Earlier this year, the RBI blocked banks from dealing with cryptocurrency businesses, Coindesk reported on June 13. According to the response, the decision was not made by the regulator through any special research or deliberation.

In its annual report, the Reserve Bank of India "reflected" on the "side effects" of the ban:

As some transactions may move away from exchanges to peer-to-peer models, including the potential for increased cash usage, this development will need to be monitored. The potential for cryptocurrency exchanges to migrate to dark pools/cash and offshore locations raises concerns regarding AML/CFT and tax issues and will need to be closely monitored.