The RBI's top officials told a parliamentary panel that Cryptocurrencies can lead to dollarisation of a part of the economy, which would be against India's sovereign interest.
According to sources, top officials of the RBI, including its governor Shaktikanta Das, have expressed their apprehensions about cryptocurrencies and said they believe they pose challenges to the stability of the financial system, according to the Parliamentary Standing Committee on Finance chaired by former minister of state for finance Jayant Sinha.
A member of the panel said it would seriously undermine the RBI's capacity to determine monetary policy and regulate the monetary system of the country.
The central bank officials said that besides being used for terrorist financing, money laundering and drug traffickers, cryptocurrencies could be a bigger threat to the stability of the country's financial system, as it's possible to replace the rupee in financial transactions both domestic and cross border.
The officials told members that cryptocurrencies can lead to the dollarization of a part of our economy, which will be against the country's sovereign interest, because nearly all of them are dollar-denominated and issued by foreign private entities.
The RBI officials said the impact of cryptocurrencies will also have a negative impact on the banking system, as attractive assets may be used to invest their hard-earned savings in these currencies, which could lead to banks having less resources to lend.
In the Union Budget presented earlier this year, Finance Minister Nirmala Sitharaman introduced a tax on trading in cryptocurrencies and related assets like non-fungible token NFTs at a flat 30 per cent and one per cent of tax will be deducted at source TDS when a transaction takes place.
There are approximately 15 million to 20 million investors in India, with total holdings of around $5.34 billion.
There is no official data on the size of the Indian criptocurrency market.
The panel of members which has former GST council head Sushil Modi, former Union Minister Manish Tewari and Saugata Roy have been holding comprehensive deliberations with the financial regulators.
Both the RBI and the SEBI report to Parliament and the panel have the responsibility to call on the officials of these regulators over the financial and economic issues of the country.
Sinha, a graduate of IIT Delhi and an MBA from Harvard Business School, was the Minister of State for Finance during the previous Modi government.