HomeCryptocurrency NewsCryptos could lead to 'Dollarisation of Economy', say RBI officials; what does it mean?

Cryptos could lead to 'Dollarisation of Economy', say RBI officials; what does it mean?

According to a panel member, RBI officials said, "It (cryptocurrencies) will seriously undermine the RBI’s capacity to determine monetary policy and regulate the monetary system of the country."

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By CNBCTV18.com May 17, 2022, 6:59:13 PM IST (Published)

Cryptos could lead to 'Dollarisation of Economy', say RBI officials; what does it mean?
According to a Press Trust of India

(PTI) report, senior RBI officials recently met with the Standing Parliamentary Committee for Finance. During the meeting, the RBI officials warned that cryptocurrencies could lead to the 'dollarisation' of the Indian economy, which would be against the country’s sovereign interest.

The meeting was chaired by Jayant Sinha, the former minister of state for finance. It was also attended by RBI governor Shaktikanta Das who has been quite vocal about the concerns surrounding cryptocurrencies.

Dollarisation occurs when a country uses the US Dollar alongside or as a replacement for its sovereign currency. In such a setup, the dollar can become the preferred currency for pricing goods, making payments and even holding savings.

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When dollarisation occurs in a country, it results in that country giving up control of its monetary and exchange rate policies. This limits the central bank’s ability to create liquidity and stabilise the economy in times of financial or economic distress.

Business Insider reported that hyperinflation victims like Bolivia are up to 80 percent dollarised. This is because the local currency has completely eroded in value, leading to the adoption of the USD as the preferred currency.

According to a panel member, RBI officials said, "It (cryptocurrencies) will seriously undermine the RBI’s capacity to determine monetary policy and regulate the monetary system of the country."

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Cryptocurrencies are primarily bought and sold in US Dollars and are also issued by private institutions overseas. RBI officials believe that this could cause an increased amount of USD transactions in the country, thus leading to dollarisation.

"Almost all cryptocurrencies are dollar-denominated and issued by foreign private entities, it may eventually lead to dollarisation of a part of our economy which will be against the country’s sovereign interest,” RBI officials told the committee members.

PTI sources also say that top RBI officials are apprehensive about the use of cryptocurrencies in the country. They warned that the stability of the entire financial system could be jeopardised as the Indian Rupee could get replaced by cryptocurrencies.

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Since cryptocurrencies are priced in US Dollars, Indians are known to exchange INR for USD before commencing a crypto purchase. This qualifies as dollarisation, albeit in less significant amounts at present.

Also, cryptocurrencies often seem like attractive investment vehicles, and Indians may park their money in crypto protocols (again, by exchanging INR for USD and then USD for crypto) - this leaves banks with less money to lend.

About 15-20 million crypto users currently operate in India, with approximately $5.34 billion in crypto holdings. The exact size of the Indian crypto market is not yet ascertained, but the sheer number of crypto users is enough to cause issues for the country’s banking system.

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Moreover, the Indian Rupee also circulates overseas thanks to cross-border payments. If cryptocurrencies become the primary mode of transaction, they could pose a threat to the existing fiat currency in circulation.

Business Insider reports that tax-friendly nations like Liberia and Panama can be genuinely deemed ‘dollarised’ as the USD frequently flows in and out of those nations, making it the most prominent currency in use.

Interestingly, two-thirds of the USD issued by the USA are circulating outside the country. This is indicative enough that the USD is finding ample use in other countries, therefore warranting the fears of dollarisation in India.
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