India's Central Bank Remains Wary of Crypto While Backing Tokenization

However, the RBI is strongly supportive of technologies related to digital assets such as distributed ledger technology and tokenization.

RBI has repeatedly shown that it appreciates the possibilities of blockchain-style technology, but it doesn’t agree with the view that privately issued crypto assets are needed to realize the benefits.

Why is RBIZ cautious about crypto?

The so-called “singleness of money” stands out as one the top concerns.

It’s basically a principle where all forms of money expressed in the same currency should be able to be exchanged at the same rate. This means physical cash in rupee terms should be worth the same as a rupee that is parked with a commercial bank.

The presence of a large number of privately issued currencies or similar instruments could disrupt the system as consumers may start dealing with assets with significant differences in terms of value or backing as compared to sovereign money.

Malhotra pointed to the possible effects of crypto on monetary policy and capital flow which is of particular relevance in emerging economies with constraints on cross-border capital flow.

These are largely in line with what the RBI has been saying for years.

The RBI has previously warned that mass adoption of crypto assets could blunt the effectiveness of monetary policy, weaken the ability to manage capital flows and also expose the system to other risks affecting financial stability and macroeconomic stability.

Malhotra also challenged the widespread argument of payments being the reason to adopt cryptocurrencies.

According to Malhotra, India already has an infrastructure for fast, cheap and convenient domestic payments.

“The problem which you are trying to solve is primarily not so much the problem of domestic payments,” Malhotra said.

Instead, cross-border payments are the more important problem, he argued. But even in this area, central bank digital currencies and interconnected regulated payment systems are an alternative to crypto, the RBI thinks.

Leaning toward prohibition

Malhotra’s latest “cautious” word is rather mild compared to the positions apparently held by the RBI amidst India’s ongoing internal tussle on crypto regulation.

In July, Reuters reviewed government documents that revealed the RBI still had a tilt towards a national crypto policy “leaning towards prohibition.”

Also, the RBI had reportedly pressed that regulated banks and other financial institutions should be restricted from having any crypto assets or private stablecoin holdings, trading or exposure.

Foreign-currency stablecoins have been a big concern as their mass adoption could dilute monetary sovereignty and make financial activity moving out of domestic banking and currency systems more likely.