The Reserve Bank of India (RBI) warned in its December 2024 Financial stability report that the widespread use of digital assets, stablecoins and tokenization based on blockchain can create significant vulnerabilities for financial stability.
“Widespread use of crypto-assets and stablecoins has implications for macroeconomic and financial stability. As highlighted in IMF-FSB synthesis paperit can reduce the effectiveness of monetary policy, exacerbate fiscal risks, circumvent measures to manage capital flows, divert available resources to finance the real economy and threaten global financial stability,” the RBI’s report warned.
“Although the size of crypto-asset markets remains small, their continued growth and increased linkages to the traditional financial system may pose systemic risks. Stablecoins also pose potential risks,” the report added.
The prices of BTC, the world’s largest digital currency, crossed the $100,000 threshold, breaking records of over $108,000 on December 17 after the US President-elect Donald Trump’s victory on November 6 when investors were positive about his second presidential term. The price of BTC has more than doubled only in 2024.
“Crypto-asset prices swung wildly and the rally, which subsided during March-September 2024, picked up thereafter, especially after US election results. This has also driven the market capitalization of stablecoins, which are primarily used to enable lending, borrowing and trading of other digital assets and support the crypto ecosystem“, the RBI report pointed out.
The RBI has always been suspicious of digital assets and went as far as recommending one complete ban on their trade. But the government imposed one of the harshest taxes on digital asset trading – a 30% flat tax on all digital assets income from April 2022 and a 1% tax will be deducted at source (TDS) from July 2022 for all digital asset transactions above INR 10,000 ($116). India also does not allow traders of digital assets to offset losses against gains.
Fortunately, Indian digital asset exchanges, which are grappling with a 90% decline in volume since the introduction of 1% TDS, witnessed five times higher trading volume after Trump’s victory, the US’s first ‘crypto president.’
Tokenization threat
“Another new and rapidly growing financial innovation is tokenization, which refers to the process of creating digital representations—known as tokens—of real-world assets using technologies such as distributed ledger technology (DLT). The tokenization of financial assets—bank deposits, money market fund shares , repos and government securities – are increasing,” the RBI said in its Financial Stability Report.
Blockchain-based tokenization can reveal several financial stability vulnerabilities, including liquidity and maturity imbalances, leverage, asset price and quality, interconnection and operational fragilities, RBI warned.
“Given that it is still in its infancy, financial stability concerns for asset tokenization are currently limited. Nevertheless, it has the potential to deepen the connection between the traditional financial system and the decentralized financial system (DeFi), including the ecosystem of crypto-assets, and cause contagion to a wider financial system, RBI says.
But most Web3 entrepreneurs know it tokenize real assets (RWA) has significant potential in India. For example, Timechain Labswhich has trained developers and channeled talent to BSV ecosystemis looking to tokenize real assets like funds instead of focusing on digital currencies.
In December, RBI Deputy Governor M. Rajeshwar Rao said the emergence of new products such as tokenized assets had forced lawmakers to stay vigilant and seek appropriate safeguards.
In August, Michael Debabrata Patra, another RBI deputy governor, noted that of India increasing use of blockchain has strengthened the case for tokenized deposits – digital representations of traditional bank deposits stored on secure blockchains. Patra emphasized that tokenized deposits can be used in various applications, including domestic and cross-border payments, trading, settlement and cash handling. In addition, their programmability enables integration into smart contracts, enabling the seamless merging of payment information and value for instant settlement.
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