RBI's cautious approach to crypto driven by risks to monetary policy, singleness of money: Sanjay Malhotra

The Reserve Bank of India has adopted a cautious approach towards cryptocurrencies because of their potential implications for monetary policy and the “singleness of money”, Governor Sanjay Malhotra said on October 3, even as he argued that central bank digital currencies and other payment innovations could address gaps in cross-border transactions.

“In so far as crypto is concerned, (there is the issue of) singleness of money and its implications for monetary policy,” Malhotra said at the Kautilya Economic Conclave in New Delhi.

“It has been a cautious approach,” he said.

Malhotra said India's domestic payment system was already fast, inexpensive and convenient, making cross-border payments the larger unresolved challenge.

“Domestic payments within our country are fast, cheap and convenient. The problem is of cross-border payments, and other means like the Central Bank can solve that problem,” the RBI Governor said.

Former European Central Bank president Jean-Claude Trichet, speaking at the same conclave, offered a sharper assessment of the growth of cryptocurrencies globally.

“We let crypto gallop, which is hampering global finance,” Trichet said.

AI valuations emerge as another risk

Crypto was not the only technology-linked financial risk flagged by Malhotra.

The RBI Governor warned that a slowdown in the artificial intelligence investment cycle or weaker-than-expected earnings could trigger a sharp correction in financial assets, particularly companies linked to the AI ecosystem.

“The AI investment cycle has been a major support for global markets,” Malhotra said.

Any slowdown in AI investment or earnings could “trigger a sharp repricing of financial assets, especially in the AI value chain”, he said.

For India, however, such a correction in advanced economies could potentially result in a reallocation of global capital.

Indian equity markets have themselves corrected from elevated valuations in recent months, but those movements have so far remained orderly, he added.

Cyber risk immediate AI concern

Beyond financial-market valuations, Malhotra identified cyber risk as perhaps the most immediate threat arising from increasingly sophisticated AI tools.

“With the development of sophisticated AI tools... the most immediate concern is regarding cyber risk,” he said.

The interconnected nature of the financial system meant weaknesses in the cyber capabilities of one institution or country could potentially have consequences far beyond their point of origin.

Malhotra warned that the next financial crisis may therefore not necessarily start inside a bank or even within the traditional financial system.

“It may begin with a geopolitical event, a cyberattack or a technological failure that affects the financial system through multiple channels,” he said.

This would require regulators to better map interconnected institutions, technological dependencies and channels through which financial stress could spread.

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