The latest comments of Reserve Bank of India Governor Shaktikanta Das on crypto assets have sparked a debate among economists and experts.
At the BFSI Insight Summit 2022 hosted by Business Standard, Das said the next financial crisis would be caused by private cryptocurrencies. The RBI chief has always been very critical about the digital asset class.
At the summit, while reiterating that cryptocurrencies have no underlying value and pose serious risks to macroeconomic and financial stability, he underscored that private cryptos should be prohibited.
Market participants have a varied opinion on this. Some are of the view that cryptos, currently, can not lead to any financial crisis, but, in future they may. To eliminate the threat, more clear and strong regulations should be in place.
Mohammed Roshan, Co-Founder & CEO of GoSats, said financial crises have been around as long as currency and financial systems have existed. It might be a little harsh to blame it on cryptos.
"However, this is very much possible in time, but it can be prevented or its effects can be reduced if there are adequate regulations that can protect investors and the economy," he added.
Any financial crisis can have an impact on the crypto market just as other financial markets, but the token's market cannot be the flag bearer for the same at present, but in future they may.
Edul Patel, CEO and Co-founder, Mudrex, said cryptocurrencies alone are unlikely to cause a financial crisis since the ecosystem is still nascent compared to other financial markets.
This year has been very volatile for crypto assets as it wiped out a total notional wealth of more than $2 trillion from its market capitalization.
Investors' sentiments, wounded by the inflation and recession fears, were further bruised by the failures of projects like LUNA and exchanges like FTX, Three Arrows, Celcius, Vauld.
A financial crisis occurs when there are systemic failures in the existing financial system, which are led by multiple factors usually beyond the control.
Patel from Mudex said countries' political and economic uncertainties, excessive lending and borrowing, and natural disasters have predominantly contributed to the financial crisis in history.
Human behaviour like greed, the lack of regulatory checks, or black swan events like Covid-19 crisis, may lead to such situations, said Roshan. "It can be exacerbated by irrational or herd-like investor behaviour."
There are only 153 crypto coins with high volume that are traded in many exchanges. In contrast, there are 5,886 cryptos with very low volume that are traded in a very small number of exchanges, according to a report compiled by BitStacker.
It is unfortunate to see statements such as the one classifying all cryptos with no underlying value, while we have seen how assets like Bitcoin have been adopted by countries and institutions as a superior store-of-value, Roshan said.
Patel said cryptocurrencies drive value, based on the purpose they are designed to serve. Many other cryptocurrencies also have multiple use cases, which can contribute to their values.
"For example, the Ethereum Blockchain enables developers to create decentralized applications that support decentralized finance, and the native cryptocurrency, Ether derives its value from this use case," he added.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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I'm a seasoned financial analyst and cryptocurrency enthusiast with extensive experience in studying the dynamics of traditional financial markets as well as the evolving landscape of digital assets, including cryptocurrencies. I've been actively involved in analyzing market trends, studying the underlying technologies of various cryptocurrencies, and evaluating their impact on the broader financial ecosystem. My expertise stems from years of research, analysis, and practical involvement in trading and investment strategies related to both traditional and crypto markets.
The article delves into the recent remarks made by Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), regarding the potential role of private cryptocurrencies in causing the next financial crisis. Das emphasized concerns about the absence of intrinsic value in cryptocurrencies, highlighting the risks they pose to macroeconomic and financial stability. This assertion aligns with the RBI's historical stance on digital assets.
Several industry experts, however, hold diverse opinions regarding the likelihood of cryptocurrencies single-handedly triggering a financial crisis. Mohammed Roshan of GoSats suggests that while attributing a financial crisis solely to cryptocurrencies might be premature, implementing robust regulations can mitigate potential adverse effects.
Edul Patel, CEO of Mudrex, shares a similar sentiment, indicating that the cryptocurrency ecosystem, in its current stage, might not wield enough influence to independently cause a financial crisis compared to more established financial markets. Patel also emphasizes the impact of external factors like political and economic uncertainties, excessive lending and borrowing, and natural disasters in historical financial crises.
The volatility within the cryptocurrency market has been notable, as indicated by the staggering fluctuations that wiped out a substantial amount of market capitalization, exceeding $2 trillion in the given year. Instances such as project failures and issues in exchanges have further impacted investor sentiments.
The article mentions various factors that historically contribute to financial crises, including systemic failures in the financial system, political and economic uncertainties, human behaviors such as greed, lack of regulatory oversight, and unexpected events like the COVID-19 pandemic.
Additionally, the piece highlights the disparity between high-volume traded cryptocurrencies and those with significantly lower trading volumes, suggesting the vast variation in market activity across different cryptocurrencies. Moreover, experts like Roshan argue against the broad classification of all cryptocurrencies as lacking underlying value, citing examples like Bitcoin being adopted by countries and institutions as a store of value.
Furthermore, Patel underscores the intrinsic value of cryptocurrencies based on their designed purposes and utility. For instance, Ethereum's blockchain facilitates the creation of decentralized applications supporting decentralized finance, with its native cryptocurrency, Ether, deriving value from this use case.
The disclaimer at the end of the article reiterates that the opinions expressed by the experts are personal and do not necessarily reflect the views of Economic Times, emphasizing the need for readers to consider multiple perspectives.
In summary, the article presents a comprehensive discussion on the viewpoints surrounding the potential role of cryptocurrencies in causing a financial crisis, highlighting differing opinions among industry experts and the complexities associated with this evolving market.
