Dollarisation Due to Cryptocurrencies

For Prelims: RBI, Dollarisation and De-dollarisation, cryptocurrencies, forex reserves

For Mains: Dollarisation Due to Cryptocurrencies, Effect of Policies & Politics of Countries on India's Interests

Recently, Reserve Bank of India (RBI) told a parliamentary panel that cryptocurrencies can lead to "dollarisation" of a part of the economy which would be against India's sovereign interest.

Dollarisation is a form of currency substitution, where dollars are used in addition to or instead of the local currency of a country.
- Though only tax havens like Liberia and Panama can be defined as ‘dollarized’ in a true sense, there are many economies dollarised to a large extent.
In fact, two-thirds of dollars are held outside the United States which issues it.
- Countries which have been victims of hyperinflation like Bolivia have become dollarised too, with over 80% of the currency in use being dollars.

It refers to reducing the dollar’s dominance of global markets. It is a process of substituting US dollar as the currency used for:
- Trading oil and/ or other commodities
- Buying US dollars for the forex reserves
- Bilateral trade agreements
- Dollar-denominated assets
The dominant role of the dollar in the global economy provides the US a disproportionate amount of influence over other economies. The US has for long used imposition of sanctions as a tool to achieve foreign policy goals.
- The de-dollarisation is driven by the desire to insulate the Central Banks of the Countries from geopolitical risks, where the status of the US dollar as a reserve currency can be used as an offensive weapon.

In spite of its current inflation troubles, India is far away from dollarisation to this extent.
- However, according to some research papers, Indian EXIM transactions are dominated by dollars.
86% of both Indian imports and exports are invoiced in dollars.
Only 5% of India’s imports and 15% of exports are from and to the US.
- It shows that few countries use their own currencies for international transactions due to the popularity of the dollar abroad.

Challenges to the Stability of the Financial System:
- Central banks of economies with high dollarisation, become bodies with no power.
- Cryptocurrencies have the potential to be a medium of exchange and replace the rupee in financial transactions both domestic and cross border.
  - This is one of the reasons why RBI has opposed it, and the Indian finance ministry has backed them by imposing a 30% crypto tax on it without officially 'allowing' it in India.
- This move aimed to stall Indian rupees going up into purchasing virtual assets which will then be owned by foreign entities - that cannot be tracked by tax authorities here.
- The tax does not apply to individuals who mine cryptos to earn them but only to those who spend Indian rupees to acquire or trade in it.
Threat to Financial Sector of the Country:
- Besides being used for terror financing, money laundering and drug trafficking, cryptos pose a bigger threat to the stability of the financial system of the country.
Negative Impact on the Banking System:
- It will also have a negative impact on the banking system as these being attractive assets people may invest their hard-earned savings in these currencies which may result in banks having lesser resources to lend.
  - There are an estimated 15 million to 20 million crypto investors in India, with total crypto holdings of around USD 5.34 billion.

The US dollar is still the favoured currency for trade because no other currency is liquid enough. Even if a currency does, there would be apprehensions in nations about that currency becoming a mirror of the US dollar.
A mere change in regime along with having to bear the same manipulations albeit from a different country is not what the world wants. The only way forward would be to diversify the currency market with no one currency claiming hegemony.

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