India's Central Bank RBI Warns Crypto Could Lead to Dollarization of Economy

India’s central bank, the Reserve Bank of India (RBI), has expressed concerns that cryptocurrencies could lead to the dollarization of a part of the Indian economy. “It will seriously undermine the RBI’s capacity to determine monetary policy and regulate the monetary system of the country.”

RBI’s Crypto Warnings and Dollarization of Economy

The Reserve Bank of India (RBI), the country’s central bank, has warned that cryptocurrencies could lead to the dollarization of a part of the Indian economy, PTI reported Monday, citing unnamed sources.

During a briefing with India’s Parliamentary Standing Committee on Finance, top RBI officials, including Governor Shaktikanta Das, “clearly expressed their apprehensions about cryptocurrencies,” the publication conveyed.

The committee, chaired by former Minister of State for Finance Jayant Sinha, also recently questioned the Securities and Exchange Board of India (SEBI) on crypto-related issues.

Emphasizing that cryptocurrencies pose challenges to the stability of India’s financial system, the RBI officials stressed:

It will seriously undermine the RBI’s capacity to determine monetary policy and regulate the monetary system of the country.

India’s central bankers also noted that cryptocurrencies are used for money laundering, terrorism financing, and drug trafficking.

Moreover, they warned that cryptocurrencies could be used as a medium of exchange, replacing the rupee (INR) in both domestic and cross-border financial transactions.

The RBI officials opined:

Almost all cryptocurrencies are dollar-denominated and issued by foreign private entities. It may eventually lead to dollarization of a part of our economy which will be against the country’s sovereign interest.

The RBI officials further explained that cryptocurrency will have a negative impact on the banking system. They noted that this asset class is attractive to people who may want to invest their hard-earned savings in it, resulting in banks having less resources to lend.

According to an industry estimate, there are approximately 15 million to 20 million crypto investors in India, with total crypto holdings of around $5.34 billion.

The Indian government is currently working on the country’s crypto policy. However, cryptocurrency income is already taxed at 30%. On July 1, a one percent tax deducted at source (TDS) will also start levying on crypto transactions.