With Bitcoin climbing to new heights and being adopted by key figures like Elon Musk, India’s central bank seems to have no confidence or belief in cryptocurrencies.
Shaktikanta Das, director of the Central Bank of India (RBI) last week, said that the central bank has “some major concerns about the cryptocurrency” and its impact on financial stability. Das also said he raised his concerns to the government of India, which was scheduled to discuss a bill banning private digital currencies in parliament.
This concern of Das could have big consequences for the crypto space in India. Just a year ago, Indian crypto exchanges were shaking under the influence of an RBI circular asking financial institutions not to support digital currencies. Even though this circular was overturned by the court, the shadow of the ban on cryptocurrencies in India still looks great.
Why is Bitcoin still viewed with suspicion in India, despite getting approval from global financial institutions? Are Das’s concerns legitimate?
Bitcoin is volatile
Of course, there is some truth to the claim that cryptocurrencies are rivals of central banks because they cannot control them like sovereign currencies. However, the concerns expressed by the president of RBI are not entirely unfounded.
For example, Bitcoin, the foremost digital currency, has generated excellent returns since its inception, outpacing all asset classes for a decade. However, it remains a speculative investment.
Bitcoin doesn’t get its value from any asset or earnings. So the value depends entirely on what an investor is willing to pay for it. As a result, its price can easily change direction. The price of Bitcoin rose significantly on February 8, after the electric car manufacturer Tesla announced that it purchased $ 1.5 billion of bitcoin. However, Musk dropped 10% within a few days after he said the bitcoin price seemed high.
Volatility is not new to Bitcoin. Bitcoin fell sharply in February and March of last year, even when the spread of Covid-19 and the economic slowdown shook stock markets.
Extreme volatility also means that digital currencies are not the best method of payment.
With its value fluctuating greatly in a short time, it can destabilize the economy where goods and services are bought and sold daily in foreign currency. If the value of the payment changes frequently, it can create great uncertainty for buyers and sellers.
Money laundering and security concerns
Another major concern for the central bank of India is the anonymity that cryptocurrencies offer to their investors. While the record of the bitcoins is kept in an open ledger, the identity of the owner is hidden. This can create problems for financial institutions to monitor the flow of money. And that’s why cryptocurrencies can be used to transfer money illegally or evade taxes.
Apart from the misuse of cryptocurrency, security is also a serious concern. While it is impossible to interfere with the ledger or key of digital currencies, they can be stolen from the exchange wallet as happened in India and around the world in the past. A Delhi-based cryptocurrency exchange filed a complaint for its employee for hacking and stealing bitcoins from the wallet.
Therefore, even if Bitcoin continues to outperform other asset classes and has certain advantages, concerns about cryptocurrencies are difficult to ignore, especially for a regulator.