Retail investors need to be more cautious of crypto: RBI

The Reserve Bank of India (RBI) in its monthly bulletin says retail investors need to be cautious of cryptocurrencies as the crypto ecosystem lacks accountability and stability, and is marked by regulatory ambiguity.

The banking regulator says its findings suggest that the interest in cryptocurrencies is driven by speculative motives rather than a means of payment for real economic transactions.

The findings are in accordance with a survey by UK FCA that shows a majority of investors (38%) investing in crypto assets take it as a ‘gamble to make or lose money’ indicating the risk-seeking behaviour.

Some cryptos may be backed by underlying; however, if the underlying itself is another unstable digital asset with no transparency and central bank backup, the crypto system is prone to crisis without safeguards, the RBI warns.

RBI governor Shaktikanta Das has repeatedly urged cryptocurrency investors to keep in mind that they are investing at their own risk. “They also need to keep in mind that the cryptocurrency has no underlying, not even a tulip,” he once remarked.

The RBI article comes at a time when decentralised finance (DeFi) seeks to disintermediate the traditional financial system. “Distributed ledger technology and smart contracts promise innovation in the form of DeFi, which could lower transaction cost and improve accessibility. However, purely technological aspects have limitations and in financial facets they do not match with the vision and framework of traditional finance. So far, the experience shows that the vulnerabilities of DeFi outweigh the benefits advocated for DeFi,” the RBI says.

However, developments such as the FTX crypto exchange collapse, decline in Binance and episodes of instability in stablecoins have created trust deficit in the entire crypto system, the RBI cautions.

Although the crypto promoters drive on the decentralised ‘notion’, the concentration of power has been seen with the “whales” – persons or entities that hold a large amount of cryptocurrency, enough so that their transactions alone can affect the currency’s market, the RBI article says.

Cryptocurrency value is prone to huge gyrations. Luna, a stablecoin whose value is supposed to be pegged to the US dollar, fell to near zero in just few days during May 2022. Bitcoin, the major cryptocurrency, saw its value plummeting from $67,550 on November 9, 2021 to $19,010 on June 19, 2022, within a span of six months.

The FTX crypto exchange collapse on November 11, 2022, and rapid decline in Binance, the world’s largest crypto exchange in the first quarter of 2023, spooked the entire cryptocurrency ecosystem. These developments pose regulatory challenges to authorities and policymakers due to their vulnerability and linkages with the traditional financial system, the RBI says.