News & Analysis

RBI Warns of FinTech’s Potential to Cause Instability

But we like to believe that this isn't in any way questioning the role of Fintech in expansion of the money supply through organized finance

At a time when cryptocurrencies are searching for the bottom and the non-fungible tokens (NFT) are just getting noticed in some very specific verticals, the Reserve Bank of India has thrown in a warning on FinTech industry’s potential to destabilze stating instead that the broader financial system needs to be shielded from possible instability.

However, the apex bank was quick to acknowledge the Fintech industry’s role in democratizing access to organized finance but offered a sharp commentary on crypto assets claiming that they could potentially weaken the management of exchange rates and financial regulations. 


Technology is fine, but…

“BigTechs can scale up rapidly and pose risk to financial stability, which can arise from increased disintermediation of incumbent institutions,” the RBI sais in its Financial Stability Report published on Thursday. It also noted that “complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour.”

India’s banking regulator has been sounding warning notes on decentralization and has now claimed that Fintech could potentially expose the banking system to new risks beyond prudential issues and ideas around data privacy, cybersecurity, consumer protection, compliance and policies against money laundering. 

However, the Apex Bank also accepts that Fintech has made significant progress to get money into the hands of those who really need them. It’s data valued the industry at $50 to $60 billion in 2020 with a projection to touch $150 billion by 2025, thanks to India’s 87% adoption rates – the highest across all countries. 


The danger is real says RBI

The regulator squarely called virtual currencies a danger. In fact, RBI Governor said “Cryptocurrencies are a clear danger. Anything that derives value based on make believe, without any underlying, is just speculation under a sophisticated name,” he said in the foreword to this year’s Report. 

He was quick to point out that while technology supported the expansion of financial sector across social hierarchies and geographies, its benefits could be harnessed fully only while guarding against its potential to disrupt financial stability.

The thought was that cryptocurrencies were’nt real as they aren’t issued by an issuer. They aren’t an instrument of debt or a financial asset as they do not have any intrinsic value, claimed the report claiming that history of private currencies suggests periods of instability over time as they create parallel currency systems that undermines sovereign control over money supply.

“For developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management. “Although the degree of cryptoisation thus far appears limited, its growth circumvents restrictions on exchange rates and capital controls and limits the effectiveness of domestic monetary policy transmission, posing a threat to monetary sovereignty,” the report said. 

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