Cryptocurrency

can trigger
Dollarisation of
Indian Economy
RBI warning
Kapil Kathpal
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Cryptocurrency can trigger Dollarisation of
Indian Economy, warns RBI
Context:

● Briefing the Parliamentary Standing Committee on Finance chaired by former minister of state for finance Jayant
Sinha, top officials of the RBI, including its governor Shaktikanta Das, clearly expressed their apprehensions about
cryptocurrencies and said these pose challenges to the stability of the financial system.(according to a Press
Trust of India report.)
● “The RBI has said this to the parliamentary committee last year too. The RBI is talking about the dangers of
dollarisation and banning crypto with regard to its use case as a currency or legal tender not necessarily as an asset
class,” said a source in the parliamentary committee on finance.
● As statutory bodies, both RBI and SEBI report to Parliament and the panel has the parliamentary responsibility to call
upon the officials of these regulators over the financial and economic issues of the country.
What is Dollarisation of Economy?

● Dollarisation is a form of currency substitution, where dollars are used in addition to or

instead of the local currency of a country.
● Reasons a country chooses dollarization are :
○ Dollarization is commonly chosen by countries that have high inflation and want to
stabilize their price levels and economies.
○ Countries that are highly integrated with the U.S. in trade or financial relations may find
it beneficial to dollarize.
○ Neither country needs to convert currency to buy goods. it makes trade between the
two countries -quicker and cheaper.
○ For example, Panama, Ecuador and El Salvador, have dollarized their economies.
○ In addition to it, Countries which have been victims of hyperinflation like Bolivia have
become dollarised, with over 80% of the currency in use being dollars.
Pros

● Increased volume of trade: Research has shown that

sharing a common currency boosts trade between countries
by a factor of two to three.
● Stabilized monetary policy for inflation-prone countries:
Another advantage of a common monetary unit is a
less-volatile monetary policy. Countries that overstimulate
their economies and monetize their debts are helped with a
more stable monetary policy. This is seen as a better
alternative than fixing an exchange rate, as it is more costly to
“turn back” to an old currency after adopting a different
currency.
● Commitment to price control: Dollarization also is believed
to be a pledge to help stimulate economic growth in the
country adopting it.
Cons

● Loss of independent monetary policy: Dollarization necessitates the elimination of a

freestanding monetary policy that can be used to stabilize the country’s economy during
business cycles. Independent central banks, which have full control over their currency, can
assist in making money more freely available in their countries during downturns to stimulate
aggregate demand. This can lead to more potential swings in economic output and
unemployment.
● Giving up seigniorage, or revenue from money production: Choosing to dollarize forfeits the
profits associated with minting and issuing money.
But How Crypto will lead to dollarisation?

● Cryptocurrencies are dollar-denominated (As per RBI officials ) and also issued by foreign
private entities which could lead to dollarisation.
● Apart from being used as payment for goods and services, cryptos can also be exchanged for
fiat currencies and the US Dollar is the most preferred for this exchange.
● Most Indians who buy cryptos, convert rupees to dollars, in order to buy them.
● Cryptocurrencies have the potential to become a medium of exchange and replace the rupee
in financial transactions both domestic and cross-border — thereby replacing a part of the
Indian monetary system.
● However, when a country chooses to dollarize, it will give up control of its monetary and
exchange rate policy, which limits its central bank’s ability to provide liquidity to banks and to
stabilize the economy in a financial or economic downturn.
Consequences for Indian Economy if dollarised?

● Central banks of economies with high dollarisation, become bodies with no power. Their monetary
policies which govern the local currency, will have no effect on an economy ruled by a foreign
currency.
● This is the one reasons why the Reserve Bank of India has been opposing it
● Indian finance ministry too backed their fears by imposing a 30% crypto tax on it without
officially ‘allowing’ it in India.
○ In Union Budget presented earlier this year, Finance Minister Nirmala Sitharaman introduced
a tax on trading in cryptocurrencies and related assets like non-fungible tokens (NFTs) at a
flat 30 per cent and one per cent of tax will be deducted at source (TDS) when any such
transaction takes place.
○ This move aimed to stop Indian rupees going up into purchasing virtual assets which will then
be owned by foreign entities - that cannot be tracked by tax authorities here.
○ The tax does not apply to individuals who mine cryptos to earn them but only to those who
spend Indian rupees to acquire or trade in it.
● The central bank is always worried about the movement of the Indian rupee and now more than
ever it is extra vigilant with high inflation, devaluation and of course fears of possible stagflation
looming large.
● It will also have a negative impact on the banking system as these being attractive assets
people may invest their hard-earned savings in these currencies which may result in banks
having lesser resources to lend.
○ There are an estimated 15 million to 20 million crypto investors in India, with total
crypto holdings of around USD 5.34 billion. (No official data is available on the size of the
Indian crypto market. )
Concerns expressed by RBI

● Besides being used for terror financing, money laundering and drug trafficking, cryptos pose a bigger threat to the
stability of the financial system of the country.
● It will seriously undermine the RBI's capacity to determine monetary policy and regulate the monetary system of
the country.
● 86% of both Indian imports and exports are invoiced in dollars. Only 5% of India’s imports and 15% of exports are
from and to the US (As per an article by Gita Gopinath who is now the deputy managing director of International
Monetary Fund, research papers also suggests that Indian EXIM transactions are dominated by dollars.)
● It shows that only few countries use their own currencies for international transactions due to the popularity of
the dollar abroad.
● Though only tax havens like Liberia and Panama can be defined as ‘dollarized’ in a true sense, there are many
economies dollarised to a large extent.
● In fact, two-thirds of dollars are held outside the United States which issues it. (This also helps US, to exports its
inflation abroad, it simply means due to many countries using US dollar as international currency, it reduces the supply
of dollar in USA and helps prevent inflation is US economy)
Cryptocurrencies and banks – Central Banks HATE Cryptocurrencies?

What are Cryptocurrency?

● cryptocurrency is decentralized digital money and is not controlled by any financial institution or government.
● In addition, blockchain technology introduces the ability of users to track all transactions that have been carried out.
● Blockchain in layman terms is a decentralized public ledger or record of transactions. In some ways, the blockchain
is like a database that stores information. However, this information isn’t stored in a single location. Instead, it’s held
across a distributed network and available globally.
● Once the domain of tech geeks, crypto is fast becoming a mainstream alternative to traditional currencies. In fact,
you’ll often see cryptocurrency advertised as an accepted form of payment at online stores or hailed as a prime
investment opportunity.
● Some Eg of Cryptos are: Bitcoin (BTC),Ethereum (ETH),Ripple (XRP),Litecoin (LTC),Binance (BNB) etc.
● It can be said that the cryptocurrency uses very innovative solutions. However, not everyone likes crypto development –
especially banks, which are afraid of losing its power in the financial world.
Pros and Cons of Crypto

Cons
Pros

● Bitcoin transactions are irreversible. If you send the wrong

● Instant transactions
amount or give the right amount to the wrong person, well,
● You can send coins worldwide
your options to correct things are limited.
● Zero or minimal fees
● Unsecured and largely unregulated.Cryptocurrency is
● Secure transfers
decentralized, so there are no government regulations.
● Increased liquidity
Consequently, there are no legal protections.
● Potential to deliver high investment returns
● High volatility makes cryptocurrency a high-risk
investment, you’ll still be underwater if the value suddenly
plummets.
● And finally, regardless of the huge buzz that
cryptocurrencies generate, at the end of the day, it’s not
widely accepted.
● Bitcoin mining consumed so much energy.
While different types of virtual currency may have their disadvantages, incoming regulations and backing from major corporations
are helping to dispel some of the myths surrounding cryptocurrencies. As a result, they’re likely to become even more popular,
with more companies accepting crypto payments and more people using digital currencies in day-to-day transactions.

who accepts Bitcoin?

● Microsoft
● Whole Foods
● Home Depot
● Starbucks
● AT&T
● Twitch
● Burger King
● CheapAir
● Gyft
● NewEgg

As more companies and brands begin accepting digital

coins, it’s not surprising that blockchain currencies are
growing in value and becoming more popular.
Ultimately, they offer the ability to transfer money securely
without paying hefty bank charges and waiting days for
funds to clear.
Steps taken by other countries regarding Crypto

● Most jurisdictions have accelerated their interest in crypto regulation after the collapse of Terra
(LUNA) -a cryptocurrency (The value of luna tokens has almost completely disappeared: After
reaching a high of just under $120 in April, luna's current price is a fraction of a penny.)
○ It has resulted in investors losing significant investments.
● China has banned all crypto transactions and mining within its borders in 2021 .but
recently A high court in China said Bitcoin is protected by law and has economic value,
The ruling in question declared Bitcoin as a virtual asset that is protected by Chinese law, and has
economic value, bitcoin thus is identified as a virtual property.
● So far, the chinese government has discouraged the trading of cryptocurrencies, and shunned
miners in order to reduce energy consumption and discourage the industry as a whole.
● "Virtual currency-related business activities are illegal financial activities," the People's Bank of
China It also warned Chinese citizens that crypto trading could "seriously endanger the safety
of people's assets".
Future of crypto

● Bitcoin and other cryptos have certainly changed the entire financial market. Thanks to the use of
modern technology, many people decide on this form of investment and financing. Therefore, some of the
traditional payment methods used by banks are abandoned.
● The world’s central bankers have begun to discuss the idea of central bank digital currencies
(CBDCs),(an alternative to Cryptocurrency not substitute) and now even the International Monetary Fund
(IMF) and its managing director Christine Lagarde are talking openly about the pros and cons of the idea.
China is leading the charge among major economies, pumping more than $300 million worth of a digital
renminbi into its economy so far.Cash is being used less and less, and has nearly disappeared in countries
such as Sweden and China.
● Central banks already have a centralised, permissioned, private, non-distributed ledger that allows for
payments and transactions to be facilitated safely and seamlessly.
● For central bank to adopt blockchain technology means loss of centralised control and it may not be
practical.
● Bitcoin, while popular, isn’t the main threat. It’s highly unstable—more volatile(real threat) than the
Venezuelan bolivar. Many investors sock it away rather than use it, and the underlying blockchain network is
relatively slow.
● Central bankers are particularly concerned about “stablecoins,” a kind of nongovernmental digital token
pegged at a fixed exchange rate to a currency-—the largest is Tether, with $51 billion in circulation,
● Technology and financial companies aim to integrate stablecoins into their social-media and e-commerce
platforms.
● “Central banks are looking at stablecoins the way that taxi unions look at Uber—as an interloper and
threat,”
● stablecoins in widespread use could upend the markets since they aren’t backstopped by a government’s
assets; a hack or collapse of a stablecoin could send shock waves as people and businesses
clamor for their money back, sparking a bank run or financial panic. And since they’re issued by
banks or other private entities, they pose credit and collateral risks.
● Every fiat currency now faces more competition from cryptos or stablecoins.
● “Central banks need to create digital currencies to maintain monetary sovereignty.”
● In the coming years, people might hold Bitcoin as a store of value, while transacting in stablecoins
pegged to euros or dollars.
In conclusion
● Cryptocurrencies can lead to "dollarization" of a part of the economy and this could be against the country's
sovereign interest.
● Top officials at Reserve Bank of India (RBI) reiterated their "institutional view that cryptocurrencies
should be banned," (source :CoinDesk bulletin)
● Earlier this May, Parliamentary committee on finance had "chided" representatives of India's crypto industry
for over stating the important of crypto advocacy without addressing challenges such as terrorism and
money laundering through crypto. (chided: speak out in angry or displeased rebuke)
● In spite of its current inflation troubles, India is far away from dollarisation to this extent.