The Reserve Bank of India (RBI) Thursday said the broader financial system must be shielded from the fintech industry’s potential to cause instability while acknowledging the sector’s role in democratising access to organised finance.
The central bank also continued its deprecation of crypto assets, saying they weaken the management of exchange rates and financial regulations.
“BigTechs can scale up rapidly and pose risk to financial stability, which can arise from increased disintermediation of incumbent institutions,” the central bank noted in its Financial Stability Report (FSR) published Thursday. “Moreover, 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.”
The regulator added that the emergence of fintech has exposed the banking system to new risks that extend beyond prudential issues and intersects with subjects such as data privacy, cybersecurity, consumer protection, competition and compliance with anti-money laundering policies.
“Regulators and supervisors face a challenging balancing act between innovation-friendliness and managing risks to financial stability, which requires more engagement of stakeholders such as regulators, the fintech industry, and academia,” said the report.
RBI Guv Cautions Against Crypto
Central bank data showed the Indian fintech industry, among the fastest growing in the world, was valued at $50-60 billion in 2020.
It is projected to reach $150 billion in size by 2025. India has the highest fintech adoption rate globally, at 87%, and received funding of $8.53 billion in 278 deals during 2021-22.
Separately, the banking regulator once again cautioned against the proliferation of virtual currencies, calling the instruments a ‘danger’. “Cryptocurrencies are a clear danger,” RBI governor Shaktikanta Das noted in the foreword to the report. “Anything that derives value based on make believe, without any underlying, is just speculation under a sophisticated name.”
Das said while technology has supported expanding the reach of the financial sector across social hierarchy and geography, its benefits must be fully harnessed while guarding against its potential to disrupt financial stability.
The monetary authority noted that cryptocurrencies are not currencies as they do not have an issuer; they are not an instrument of debt or a financial asset and they do not have any intrinsic value. It added that history has shown that private currencies result in instability over time and ‘dollarisation’ of the system as they create parallel currency systems, which can undermine sovereign control over money supply, interest rates and macroeconomic stability.
“For developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management,” the regulator noted in the report. “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. Problems with these assets such as price crashes could spill over to payment systems and adversely affect real economic activity.”
The regulator also added that while central banks across the world are working on pilots to introduce central bank-backed digital currencies (CBDC), a shift away from bank deposits to such instruments could potentially decrease credit availability or increase credit costs. “A majority of central banks in the BIS survey are uncertain about imposing limits on CBDC transactions or balances to counter disintermediation risk,” it said.