Retail investors should be cautious about Cryptos says RBI

Mumbai: The crypto ecosystem lacks accountability and stability and is marked by regulatory ambiguity as a result of which retail investors need to be more cautious, the Reserve Bank of India (RBI) economists said in an article titled Decentralised Finance: Implications for Financial System in the central bank’s May Bulletin. The economists in a study found that the interest in cryptocurrencies is driven by speculative motive rather than a means of payment for real economic transactions.

Their findings were in accordance with a survey by UK FCA that majority of the investors (38 per cent) investing in cryptoassets take it as a ‘gamble to make or lose money’ indicating the risk seeking behaviour.

“Decentralised finance (DeFi) seeks to disintermediate the traditional financial system. However, developments such as the FTX crypto exchange collapse, decline in Binance and episodes of instability in stablecoins have created trust deficit in the entire crypto system,” said the article.

Defi refers to crypto assets where all financial transactions are performed on a computer network without any central intermediary. DeFi ecosystem consists of protocols, applications, smart contracts and total value locked. Ethereum is one of the main blockchain networks on which DeFi protocols and applications (dApps) are built. The other major DeFi blockchains are Binance smart chain (BSC), Solana, Polkadot, Avalanche, Ripple and Cronos.

“Although it is claimed that DeFi can complement the traditional financial activities in the form of faster fund transfers and innovation, the associated risks far outweigh the purported benefits,”

said the article. Most of the instruments are speculative in nature and offer arbitrage across multiple crypto assets. Higher exposure to the liquidity and market risk may lead to investor runs. Furthermore, recent episodes of crypto exchange malpractices and the declining trust in stablecoins could impact investors’ confidence and adversely impact the exposed entities in the financial system, it said.