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Cryptocurrencies set to spark next financial crisis, Reserve Bank of India chief warns

His remarks came as 13 months since bitcoin topped out at over $68,000, its value remained below $17,000

Published: Fri 23 Dec 2022, 5:26 PM

By
Issac John

Das estimated that the total value of cryptocurrencies had shrunk to $140 billion from $180 billion or $188 billion. - File photo

Prohibit cryptocurrencies or get ready to face the next financial meltdown, Reserve Bank of India Governor Shaktikanta Das has warned.

The latest to join the bandwagon of crypto cynics, the RBI chief observed that private cryptocurrencies, if allowed to grow, would spark the next financial crisis.

Joining the rank of some of the fiercest critics of cryptocurrencies, including renowned economists and investors like Nouriel Roubini, Janet Yellen, Jack Ma, Nouriel Roubini, Warren Buffett, Ben Bernanke, amongst others, Das said the digital assets have certain huge inherent risks which could pose threat to India’s macroeconomic and financial stability.

RBU chief’s remarks came as 13 months since bitcoin topped out at over $68,000, its value remained below $17,000, losing more than three-quarters of its value. The crypto industry, once valued at roughly $3 trillion, now sits at around $900 billion.

“Our view is that private cryptocurrencies should be prohibited because if it is allowed to grow, that is, if you try to regulate it and allow it to grow…please mark my words the next financial crisis will come from private cryptocurrencies,” Das said while speaking at a banking event.

“After all the developments over the last year, including the latest episode on the built around FTX, I don’t think we need to say anything more about our stance on cryptocurrencies,” the RBI governor said.

Das estimated that the total value of cryptocurrencies had shrunk to $140 billion from $180 billion or $188 billion. “The change in value in any so-called product is the function of the market. But unlike any other asset or product, our main concern about crypto is that it doesn’t have any underlying, whatsoever. I think the term cryptocurrency or private cryptocurrency is a fashionable way of describing what is otherwise a 100 per cent speculative activity,” he said.

Prominent economist Roubini, nicknamed Dr Doom, said early this month that the cryptocurrency "bloodbath" had only just begun. Roubini is convinced that most cryptocurrency companies are now on their way to extinction after a series of high-profile bankruptcy filings.

Buffet has long believed the crypto story will not end well. Back in 2018, Buffett described Bitcoin as "probably rat poison squared." His main concern is that Bitcoin is a speculative asset that doesn't produce anything and doesn't have any inherent value. "When you buy non-productive assets, all you're counting on is whether the next person is going to pay you more because they're even more excited about another next person coming along," he has said on CNBC TV. "But the asset itself is creating nothing."

Peter Schiff, the CEO and chief strategist of Euro Pacific Capital says the only cryptocurrency he would support is one that's backed by gold. That's hardly surprising, given he's a big believer in commodities like gold, silver, and oil. “The only cryptocurrencies that would make sense would be legitimate cryptocurrencies. Just like I don’t like fiat paper currency, which is paper currency backed by real money, I don’t like fiat digital currency. But, if you have a digital currency that’s backed by gold and redeemable in gold, well then that’s fine, that’s great, I think that would work perfectly.”

Paul Krugman, the Nobel prize-winning economist, argues that Bitcoin has had 12 years to prove itself as a currency and it hasn't succeeded. "Twelve years on, cryptocurrencies play almost no role in normal economic activity. Almost the only time we hear about them being used as a means of payment -- as opposed to speculative trading -- is in association with illegal activity," he wrote.

Financial pundits say the collapse of FTX, and other falling dominoes in the sector, has led to much soul-searching among crypto promoters. “Predictably, we are hearing calls for the industry “to go back to its roots” and be reborn in a purer form. The vision is to turn back the clock to the days when crypto was the preserve of a small group of enthusiasts rather than something marketed as a mainstream financial product.”