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Governor Shaktikanta Das has said cryptocurrencies are a “clear danger” and anything that derives value based on make-believe, without any underlying, is just speculation under a sophisticated name. He added that as the financial system gets increasingly digitalised, cyber risks are growing and need special attention.

“While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against. As the financial system gets increasingly digitalised, cyber risks are growing and need special attention,” Das said in the RBI’s ‘Financial Stability Report, June 2022’.

The report said the market value for cryptoassets grew 10-fold from early 2020 to late 2021 when it peaked at almost USD 3.0 trillion before recording a sharp decline below $1 trillion in June 2022. “Technological advances powered by cryptography and distributed ledger technology (DLT) have led to the rise of new digital assets such as cryptoassets and stablecoins, which generally have no underlying assets and are primarily used for speculative investments.”

The Financial Stability Report also said the risks from cryptoassets to financial stability appear to be currently limited as the overall size is small (0.4 per cent of global financial assets) and their interconnectedness with the traditional financial system is restricted. The associated risks are, however, likely to grow as these assets and the ecosystem supporting their growth are evolving.

“The risks from stablecoins that claim to maintain a stable value against existing fiat currencies require close monitoring, in particular – they are akin to money market funds and face similar redemption risks and investor runs because they are backed by assets that can lose value or become illiquid in times of market stress,” the report said.

Cryptocurrencies, typically created on decentralised systems, are designed to “bypass” the financial system and all its controls, including Anti Money Laundering (AML)/Combatting the Financial Terrorism (CFT) and Know Your Customer (KYC) regulations, it added.

Currently, the market capitalisation of a total of 19,920 cryptocurrencies trading on 528 exchanges stands at $908.7 billion, with Bitcoin accounting for 44 per cent of this market capitalisation. The top two cryptocurrencies account for 59 per cent, while the top-five account for more than three-fourths.

“Cryptocurrencies are not currencies as they do not have an issuer, they are not an instrument of debt or a financial asset and they do not have any intrinsic value. At the same time, cryptocurrencies pose risks,” the RBI said.

Meanwhile, the rules regarding the tax deducted at source on virtual digital assets (VDAs) and cryptocurrencies have come into effect from Friday (July 1). The rules make it mandatory for the purchaser of a VDA to deduct 1 per cent of the amount paid to the seller (resident Indian) as income tax deducted at source (TDS).