Cryptos are matter of concern for the RBI on four possible counts.

Monetary Sovereignty

Cryptos erode monetary sovereignty especially with stablecoins which are pegged to a reserve asset such as a dollar, one to one. Bitcoins were okay, as these were backed by no more than algorithm.

The reserve backing provides gravitas to pull transactions away from the national currency. RBI loses its ability to set the interest rate, calibrate money supply and control inflation.

Facebook’s proposed stablecoin Diem could become a viable competitor to fiat currencies.

Dollar-backed stablecoins are advantageous to the US and therefore the US will be disinclined to regulate them.

Conduits for Capital Outflows

Investors put domestic money in crypto exchanges, and exit out of it abroad in a hard currency. China is reported to have lost as much as $80 billion through cryptos in 2020. Therefore, it banned all crypto transactions.

Financial Instability

Cryptos are highly volatile, e.g. Bitcoin fluctuates between $1000 to $70000 in recent times. It is akin to Tulip mania of the 17th century. Such volatility makes banks vulnerable.

Loss of Seigniorage Revenue

RBI buys assets such as government securities. It pays for those by printing currency. The returns earned by RBI are called seigniorage revenues. Ultimately, it accrues to the government. Cryptos could eat into this revenue.