The Reserve Bank of India (RBI) has published an article titled “Decentralized Finance: Impact on the Financial System” in its latest bulletin, which provides an in-depth analysis of the relationship between decentralized finance and traditional financial systems. The report emphasizes that the speculative demand for crypto assets dominates the crypto market and drives market volatility, requiring retail investors to exercise more caution in this unstable and irresponsible market.
In its May 2024 monthly bulletin, the Reserve Bank of India (RBI) released an article titled “Decentralized Finance: Impact on the Financial System.” The report delves into the cryptocurrency ecosystem, particularly the relationship between decentralized finance (DeFi) and traditional financial systems.
The report points out that the connection between crypto assets and traditional finance is mainly reflected in the exposure of banks and financial sectors, as well as liquidity exposure. The traditional financial system may be linked to crypto assets in various ways. Firstly, through deposit channels, banks hold deposits from companies that offer stablecoins and NFTs, among other crypto assets. According to the September 2022 “Basel III Monitoring Report,” a survey showed that the crypto asset risk exposure of banks accounts for 0.14% of their total assets.
Additionally, banks participate in clearing crypto asset derivatives and futures, underwrite initial coin offerings (ICOs), and issue securities related to crypto assets. Banks are also involved in insurance and other services such as custody and wallets. If these interactions continue to grow, financial risks may further increase. Therefore, the report emphasizes the urgent need to formulate timely policies for fintech and traditional financial institutions.
The report further states that there is a close correlation between the market value of Ether and market volatility. The market value experienced exponential growth in the late stage of the COVID-19 pandemic, synchronously increasing market volatility. This indicates that speculative motives may be the basis for the rise of Ether. The report concludes based on empirical analysis:
This finding aligns with a survey conducted by the UK Financial Conduct Authority (FCA) in 2021. The survey revealed that the majority of investors in crypto assets (38%) view it as gambling, aiming to make or lose money, reflecting their risk-taking behavior. The report warns:
The report also explains that certain cryptocurrencies claim to be backed by actual assets. However, if these assets themselves are another unstable digital asset without transparency and central bank support, the entire crypto system is prone to crisis in the absence of security measures.
Currently, India lacks a specific regulatory framework for cryptocurrencies. The Securities and Exchange Board of India (SEBI) recently submitted a proposal for crypto asset regulation to the government advisory committee, suggesting that different regulatory bodies oversee specific aspects of crypto asset trading.
For example, SEBI states that it can monitor crypto assets appearing in the form of securities and initial coin offerings (ICOs). The Reserve Bank of India can regulate assets supported by stablecoins and other legal tender currencies. The Insurance Regulatory and Development Authority of India (IRDAI) can, together with the Pension Fund Regulatory and Development Authority (PFRDA), regulate virtual assets related to insurance and retirement funds. The Indian Ministry of Finance has yet to publicly respond to this proposal.