Cryptos are a threat to financial stability

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Cryptos are a threat to financial stability

  • As per RBI, Investors in cryptocurrencies, when they are investing, should keep in mind that whatever they are investing is at their own risk.
  • Cryptocurrencies have no underlying [asset], not even a tulip.
  • Central bank is carefully working to come out with its own Central Bank Digital Currency (CBDC).

What is CBDC?

  • The RBI, as stated in the Union Budget proposal, will come out with the CBDC by the end of the next financial year.
  • The digital currency would be like the paper currency but in virtual form. It can be used digitally to make payments.
  • The CBDC is backed by the RBI, while any other cryptocurrency is privately created.

What is the difference between CBDC and Cryptocurrency?

  • CBDC is a digital or virtual currency but is not comparable to the private virtual currencies that have mushroomed over the last decade.
  • As per RBI, private virtual currencies are at substantial odds with the historical concept of money because they are not commodities or have no intrinsic value.
  • While a CBDC is centralised, cryptocurrencies are decentralised and do not represent any person’s debt or liabilities and have no issuer.

RBIs concerns regarding cryptocurrencies

  • The Reserve Bank of India is concerned about cryptocurrencies because they could pose a danger to the Indian currency.
  • The need for rupee-based savings, like as provident funds, will diminish if a large number of investors invest in digital coins rather than rupee-based savings. This will limit banks' capacity to lend money to their consumers.
  • Furthermore, because cryptocurrencies are unregulated and difficult to trace in the country, the government will be unable to tax the amount, creating a danger to the rupee.
  • Furthermore, cryptocurrencies can be utilised for illegal activities such as money laundering.
  • Because crypto coins are volatile, investors are vulnerable to hacks, frauds, and losses for all of these reasons.
  • Since cryptocurrencies acquired popularity in India as a result of a dramatic rise in Bitcoin prices, the RBI has frequently stated its strong opposition to them.
  • The central bank claims that cryptocurrencies are a severe danger to the country's macroeconomic and financial stability.
  • The number of investors trading on them, as well as their purported market value, were also questioned by the RBI.
  • The governor of the Reserve Bank of India has renewed his opposition to cryptocurrencies, claiming that they pose a severe threat to any financial system because they are unregulated by central banks.

About Dutch Tulip Bulb Market Bubble

  • The tulip bulb market bubble in the Netherlands, commonly known as 'tulipmania,' was one of the most well-known market booms and crashes in history.
  • It happened in Holland in the early to mid-1600s, when tulip bulb prices skyrocketed due to speculation.
  • The most valuable tulip bulbs sold for up to six times the average person's annual wage during the peak of the market.