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RBI proposes common approach to crypto-assets to address potential risks


MUMBAI: To address potential financial stability risks and protect investors, it is important to achieve a common approach to crypto assetsThe financial stability report released by the RBI on Thursday said.
In this context, different options are being considered internationally.
One option, the report said, is to adopt the same risk-same principle and regulation and follow the same regulation that applies to traditional financial intermediaries and exchanges.
Another option is to ban crypto-assets, as their actual use cases are almost negligible and the challenge is that different countries have different legal systems and individual rights compared to other countries. state force, it noted.
The third option is to let it blow up and make it systemically irrelevant because the underlying instability and risk will ultimately prevent the sector from growing, it said.
The third option, however, is fraught with risks as the sector could become more closely linked to mainstream finance and divert finance away from traditional finance with broader impact on the economy. fact, the report said.
It turns out that adapting new business models and technologies after they have evolved at the system level is challenging.
To promote responsible innovation and reduce financial stability risks in the crypto ecosystem, the report says it is important for policymakers to design an appropriate policy approach. fit.
In this context, under India’s G20 presidency, one of the priorities is to develop a framework for global regulation, including the possibility of banning unsupported crypto assets, stablecoins and non-financial finance. centralized (DeFi).
The collapse and bankruptcy of crypto exchange FTX and the subsequent sell-off in the crypto-asset market have highlighted the inherent vulnerabilities in the crypto ecosystem.
Recently, Binance, the largest cryptocurrency exchange, also banned stable withdrawals on its platform. The boom of FTX came before the failure of TerraUSD/Luna, an algorithmically stable currency, the run on Celsius, a crypto lender, and the bankruptcy of Three Arrows Capital, a electronic money hedge fund.
Observing that the turmoil provided some insight, it indicates that the crypto asset is highly volatile.
Bitcoin price has dropped 74% (on December 14, 2022) from its November 2021 high. Other crypto assets also experienced similar price drops and increased volatility.
Additionally, crypto assets exhibit a high correlation with stocks, it noted.
Furthermore, it said, contrary to claims that they are an alternative source of value due to inflation-hedging benefits, the value of crypto assets has declined even as inflation has increased.
Second, the report said, the demise of TerraUSD/Luna is a reminder of how so-called stablecoins promise to maintain a stable value relative to fiat currencies subject to classical trust practices.
Ultimately, it said, the failure of FTX and Celsius shows that crypto exchanges and exchanges are performing different functions such as lending, brokerage, clearing and settlement. There are different risks without the right governance structure.
This exposes them to credit, market and liquidity risks that are disproportionate to what is needed to perform their essential functions, adding leverage is a frequent theme in the ecosystem. cryptocurrency, causing rapid failures and large and sudden losses.

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