A day after Reserve Bank of India (RBI) Governor Shaktikanta Das cautioned the public against crypto trading, stating that cryptos will cause the next financial crisis, crypto experts seem to disagree.
Das was speaking a media conclave on December 21, 2022, where he warned the public of the ‘inherent risk’ cryptocurrencies pose to the country’s macroeconomic and financial stability.
“Cryptocurrency has certain huge inherent risks for our macroeconomic and financial stability. However, after looking at the latest episode of FTX, I don’t think we need to say anymore,” Das said.
But can crypto lead to a financial crisis? Crypto industry experts seem to disagree.
Can Cryptos Lead To A Financial Crisis?
Financial crises are primarily caused as a result of a complex web of market conditions, including financial bubbles, market manipulation, under-collateralised loans, excessive defaults, and the collapse of major institutions, according to experts.
Crypto industry experts have opined that this assumption is largely misplaced. Crypto assets comprise just 1 per cent of total global financial assets, they have said.
It is important to note that none of the crises i.e., the Terra Luna or the FTX (the world’s second-largest crypto exchange), had any impact on the global financial markets. More importantly, there were no bailouts, as is the tradition.
Says Rajagopal Menon, vice-president, WazirX, a crypto exchange: “The FTX crisis happened because of one individual – Sam Bankman-Fried’s greed. Also, it’s important to remember that Bernie Madoff, Bear Stearns, and Lehmann brothers occurred in the most regulated markets – the United States. It is essential to have a constructive dialogue about regulation, because for the last 10-12 years, many people have been trying to wish away crypto, but to no avail.”
Countering Das’ statement, Purshottam Anand,Founder of Crypto Legal and member of India Blockchain Forum said that depending on the prevalent market practices, every asset of significant size, for example – real estate, stocks, derivatives, bond and sovereign debt, can cause the next financial crisis. But, that doesn’t mean all these asset classes should be banned, he added.
He further argued that regulators should not shrug off responsibility and ban every asset which can potentially cause the next financial crisis.
“RBI , as a regulator, should prescribe the dos and don’ts for the crypto players to ensure that this asset class does not cause any financial instability or crisis,” he added.
Says SC Garg, former finance secretary: “All financial crises are caused by excessive asset investment built up on still excessive credit leverage. Crypto assets purchases were not built up on excessive credit. Crypto assets have already crashed by more than two-third of their highest valuations without causing any financial crisis for this reason.”
Ajeet Khurana, a crypto analyst and founder of the Web 3.0 platform, Reflexical, believes that as a segment of the financial market grows in size, failure in that segment can lead to crisis.
“However, it is the job of the regulator, especially one who has been able to forecast the risk, to do something about it,” he says.
The cryptocurrency market is still in its early stages compared to other asset classes, though it has attracted significant attention.
Says Amanjot Malhotra, country head – India, Bitay,a crypto platform: “At the moment crypto doesn’t hold that much value to cause a global financial crisis, but with the way users all over the world are adopting crypto, it can be possible one day that a big crypto company crash could cause a financial crisis.”
By the time 2022 comes to a close, the value of the crypto economy relative to the US dollar will have decreased by almost $1.486 trillion. Bitcoin was trading for $46,406 on December 20, 2021; it has since lost more than 63 per cent of its worth, while Ethereum, the second largest cryptocurrency, has lost 69 per cent of its value relative to the dollar in the same period, according to Bitcoin.com.
