Cryptos can lead to dollarisation of economy: RBI officials to parliamentary panel

What is the News?

Officials from the Reserve Bank of India told the Parliamentary Standing Committee on Finance that cryptocurrencies can lead to the “dollarisation” of a part of the economy.

What is Dollarisation?

Dollarisation is a form of currency substitution where dollars are used in addition to or instead of the local currency of a country. 

Though only tax havens like Liberia and Panama can be defined as ‘dollarized’ in a true sense, there are many economies dollarised to a large extent. In fact, two-thirds of dollars are held outside the United States which issues it.

How crypto would lead to the dollarisation of part of the economy?

Almost all cryptocurrencies are dollar-denominated and issued by foreign private entities.

Due to this, cryptocurrencies have the potential to become a medium of exchange and replace the rupee in both domestic and international financial transactions.

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

What are the other concerns highlighted by RBI on crypto?

Crypto has a negative impact on the banking system as these being attractive assets people may invest their hard-earned savings in these currencies which may result in banks having lesser resources to lend.

Cryptocurrencies are being used for terror financing, money laundering and drug trafficking.

What are the steps taken by the Government of India to regulate Crypto?

In Union Budget 2022-23, the Finance Minister has introduced a tax on trading in cryptocurrencies and related assets like non-fungible tokens (NFTs) at a flat 30%  and 1% of tax will be deducted at source (TDS) when any such transaction takes place.

Note: There are an estimated 15 million to 20 million crypto investors in India, with total crypto holdings of around USD 5.34 billion. However, no official data is available on the size of the Indian crypto market.

Source: The post is based on the article “Cryptos can lead to dollarisation of economy: RBI officials to parliamentary panel” published in Economic Times on 16th May 2022.