Private cryptocurrencies pose immediate risks, prone to frauds: RBI report

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The proliferation of private cryptocurrencies across the globe have sensitised regulators and governments to the associated risks, said RBI Financial Stability Report (FSR), adding that they pose immediate risks to customer protection.

Private cryptocurrencies are also risks against anti-money laundering (AML) and combating the financing of terrorism (CFT), the RBI report noted.

They are also prone to frauds and to extreme price volatility, given their highly speculative nature. Longer term concerns relate to capital flow management, financial and macro-economic stability, monetary policy transmission and currency substitution, said the FSR report which is released bi-annually.

“According to the Financial Action Task Force (FATF)12, the virtual asset ecosystem has seen the rise of anonymity-enhanced cryptocurrencies (AECs), mixers and tumblers, decentralised platforms and exchanges, privacy wallets, and other types of products and services that enable or allow for reduced transparency and increased obfuscation of financial flows,” the report further noted

RBI said the aggregate market capitalisation of the top 100 cryptocurrencies has reached $2.8 trillion, adding that in the emerging market economies that are subject to capital controls, free accessibility of crypto assets to residents can undermine their capital regulation framework.

The RBI report has also sounded alarm on rapid growth of decentralised finance that is geared predominantly towards speculation and investing and arbitrage in crypto assets, rather than towards the real economy.

“The limited application of anti-money laundering and know your-customer (AML/KYC) provisions, together with transaction anonymity, exposes DeFi to illegal activities and market manipulation, and poses financial stability concerns.”

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