If cryptos are supported, it undermines the fiat currency and the ability of the authorities to influence money supply.

Cryptos ultimately replace the fiat currency to some extent. It is like allowing a parallel currency system in the country. If India allows crypto transactions, these could lead to dollarization of Indian economy. In other words, we are allowing legal tender as well as dollar as currency for transactions. It affects the monetary policy. The ability of the authorities to control the money supply or interest rate gets affected. These policies cannot be applied to cryptos. The country thus loses its policy control of the economy.

The banking system too gets affected if cryptos are permitted. They loose the power to create bank money or cash credit. Even the ability to mobilise deposits is affected. Credit creation of convertible currencies is not amenable to monetary policy. If major chunk of deposits and credit shift to cryptos, the banking system suffers seriously. It impairs the financial stability of the country.

Cryptos are used for cross-border funds transfer. Cryptos are non-reserve currencies. They could seriously affect India’s foreign exchange reserves. These transactions could occur outside capital account regulations.

Of course, stable coins could be more effective than the volatile cryptos.

India has to be circumspect. Advanced economies are on different footing. They would not ban cryptos for strategic reasons. It could give advanced economies global control. Another country could control Indian’s economic policy if there is large scale substitution of fiat currency with cryptos.

Cryptos could be treated as a store of value. However, it should be understood that the demand as a store of value is more for a currency than the transaction demand. It is similar to a competition between fixed deposits and transaction deposits. As a store of value, fiat currency is anchored by monetary policy. Cryptos are just a matter of belief. They are not anchored.

Cryptos are difficult to regulate as they are difficult to define.

According to T. Rabi Sankar, Dy. Govenor, RBI, considering all the above arguments, it is necessary to ban cryptos. There are lot of conflicting signals. The investors feel the RBI officials are creating FUD, crypto slang for fear, uncertainty and doubt.