India’s stance on financial services, including cryptocurrencies and digital assets, are in focus given the perception that the country is a rare bright spot amid the rising global economic uncertainty. The role of cryptocurrencies in posing a challenge to monetary exchanges is especially in focus. While digital assets promise enhanced security and transparency, they also remain vulnerable to fraud. This explains the stringent regulatory scrutiny they face worldwide, sparking heated debates. 

The Reserve Bank of India (RBI) is leading the charge in this discourse, tasked with navigating the complexities of cryptocurrency regulation. The RBI adopts a cautious approach, citing financial stability risks. However, innovators remain bullish on cryptocurrencies. With India’s growing crypto adoption, especially among its young and tech-savvy population, calls for prudent regulation have intensified amidst a rapidly evolving landscape.

Blockchain brilliance

Blockchain technology heralds a transformative era across industries, with its decentralised and immutable ledger promising heightened security, transparency, and transactional efficiency. In banking and finance, it can help optimise cross-border payments and trade finance, including seamless remittances that bypass intermediaries and cut costs. Blockchain-powered smart contracts can streamline financial agreements for global banks. The challenges, on the other hand, can derail its transformative impact.

RBI’s stance

Cryptocurrencies defy regulatory oversight with their decentralised and borderless operation, even as they disrupt the traditional banking system’s control over financial transactions. The challenges include the absence of a technological solution on the lines of the Financial Action Task Force (FATF) Travel Rule, and the risks posed by unhosted wallets. Moreover, the want of regulated entities in peer-to-peer transactions that bypass the anti money laundering (AML) and countering financing of terrorism (CFT) regulations heightens national security risks. The non-access to ledgers and audit trails can hamper efforts to rein in mis-selling cases within the crypto ecosystem.

The inherent volatility of crypto poses risks to investors, particularly those unfamiliar with digital currencies.

Although the RBI banned crypto transactions in 2018, the Supreme Court overturned it in 2020. The RBI continues to advocate for the ban, citing investor protection and systemic risks. That said, the RBI is also exploring blockchain use cases, including the development of a central bank digital currency (CBDC) called Digital Rupee and the transformation of illiquid asset trading through tokenisation to enhance accessibility and liquidity. This shift aligns with the global trend of embracing decentralised ledger technology, such as the Bank for International Settlements’ blockchain innovation hub for the development of applications such as CBDCs, cross-border payments, and digital identity solutions in coordination with central banks worldwide. 

With India’s presidency of the G20, global crypto asset regulation has become a focal point.

Addressing concerns

As the crypto landscape evolves, there is need for constructive dialogue among regulators, technologists, and the financial industry to balance innovation and security. The RBI is not against blockchain technology but specific applications. While innovators push boundaries, regulations remain crucial, prioritising safety over recklessness.

(The writer is a global expert in fintech and payments industry)