“Are cryptocurrencies a threat to financial stability and economic growth of India? Evidence from the cointegration approach”

The purpose of this paper is to investigate whether the cryptocurrency market affects the financial stability and economic growth of India. The study used time series quarterly data on bitcoin, financial stability, inflation rate, real GDP, economic volatility uncertainty, exchange rate, and market volatility index for the period 2015Q1–2022Q4. The robustness of the findings was confirmed by the fully modified OLS (FMOLS) and canonical cointegration regression (CCR). The study results demonstrated that an increase in cryptocurrency investments will affect the financial stability of India significantly. Each 1% increase in the cryptocurrency would reduce the financial stability by 5% approximately. However, there was a marginal effect of cryptocurrency on economic growth. The results also found that exchange rate volatility and inflationary pressure would also deteriorate the financial stability of the country. Furthermore, the results also identified positive and significant cointegration between economic growth and financial stability. Due to most transactions in the economy being done through the financial system, it is paramount for economic growth. Going forward, aggressive monetary policy tightening, volatility in capital flows and exchange rates, de-anchoring of inflation expectations, faltering in the economic recovery, disruptions due to global supply chains and climate change will be the major risks to the financial stability and economic growth of India.


INTRODUCTION
The uniform functioning of the economy ensures fund security and appropriate allocation of resources. In the past few years, the world economy has experienced several major challenges leading to economic uncertainty. One such challenge for an emerging country like India is to regulate the use of cryptocurrencies. If there is imparity in the financial system functionalities, the fund flow will be reduced leading to the aggregated economy. As per the sociotechnical systems theory, crypto development is dismembered into crypto operating services, governance, practices, operating platforms and practices. Cryptocurrencies have emerged as a pseudo-asset class in the past few years and have become attractive for market participants despite their high volatility rates (Yan et al., 2022). However, it is still debatable whether cryptocurrencies qualify as an actual asset class in the financial market. There has been a growing debate in the world market about legalizing digital currencies and being endowed with a booming cryptocurrency industry. Many countries like China, Egypt, Qatar, Tunisia, Bangladesh, Algeria, Nepal, Morocco, and Iraq have completely ban on the digital currencies and services surrounding cryptocurrencies. According to the report by the Law Library of Congress, 42 other countries and their jurisdictions have prohibited cryptocurrency exchanges. However, a country like India is taking cognizance of regulating and rationalizing cryptocurrency trade. Governments that have banned cryptocurrencies have revealed that the rise of crypto could destabilize their financial systems and they also possess money laundering from illegal sources. Recently, Reserve Bank of India Governor Shaktikanta Das warned that banks have serious concerns over cryptocurrencies as these are a big threat to the country's financial and macroeconomic stability due to no underlying asset (Khusboo, 2022). He further reiterated that cryptocurrencies pose similar risks to cyber security and warned investors to be cautious and invest at their risks. China fully banned cryptocurrencies in January 2022 due to its special concern about using digital currencies for fraud and money laundering. Indian government's stance on digital assets has considerably changed from an outright ban on cryptocurrencies in 2016. Currently, there is no complete ban on the use of cryptocurrencies in India, however, the Reserve Bank of India (RBI) has ordered banks to avoid supporting crypto transactions. Recently, a high-level Inter-Ministerial Committee (IMC) suggested that all private cryptocurrencies, except any virtual currencies issued by a state, will be prohibited in India (Anulekha, 2022). In the wake of recent economic uncertainties due to the COVID-19 pandemic, there is an urgent need and growing concern about economic policies and financial decisions to avoid any financial and macroeconomic instability.

LITERATURE REVIEW
The issue of financial stability has been the main focus of both academicians and policymakers. After the 2008-2009 financial crisis, new regulations were proposed to frame and supervise the financial system (Creel et al., 2015). Due to the unique nature of financial stability as a public good, new regulations have been proposed to frame and supervise the financial system. As shown in Figure 1, the bitcoin price had increased from 10,000 USD to 55,000 USD since 2020 and further declined to USD 14,000 level due to risk assets continued to get crushed. The financial stability of India declined drastically since 2020 together with increased economic volatility. GDP growth was the Source: Constructed by the author using EViews.

Figure 1.
Comparing bitcoin graph with macroeconomic and financial stability factors most affected since 2019 which declined to -20% in 2020 due to the COVID-19 pandemic. Figure 2 shows the volume of bitcoin trade in India since 2013. Due to the Indian banknote demonetization in 2016, the volume of bitcoin trading started increasing and it reached a peak of 250 million volume transactions in 2018 before RBI banned the crypto exchanges. In 2020, after the supreme court lifted the ban, the volume of bitcoin trading touched 300 million in 2020. This increase in the volume of bitcoin indicates that either investors are getting attracted to the crypto world or they are using crypto investment as a source to convert their black money to white. Chakravaram et al. (2021), while investigating the threats of cryptocurrencies, found that most people who are investing in cryptocurrencies wish to convert their black money and illegal earnings to white. Few cryptocurrency enthusiasts claim that digital money will democratize finance by redistributing power from the government to the people. Annie (2021) in an interview with key economist Eswar Prasad. He further stated that if cryptocurrencies are not regulated under the financial system to improve investors' protection, it might contribute to financial and monetary instability.
There have been growing studies that focus on the concerns over cryptocurrencies questioning the economic growth paradigm (Leonard & Treiblmaier, 2019a); exploring the relationship between cryptocurrencies and financial assets (Corbet et al., 2018; Gil-Alana et al., 2020); cryptocurrencies and global challenges (Jacobs, 2018); cryptocurrencies and stock market indices (Gil-Alana et al., 2020). However, it must be noted that there is a lack of research focused on the threat that cryptocurrencies pose to the financial stability and economic growth of the country. A financially unstable country will be poised by internal and external shocks. Intuitively, any factor that disrupts the financial system would make the system complex and would affect productive investment, uniform lending, better investment opportunities and economic activity. Theoretically, the economy or financial system is destabilized due to recession, uncertain government policies (policy paralysis), or collapse of financial or non-financial institutions (Mishkin, 1999). Policymakers, whose job it is to ensure the stability of the financial markets, as well as investors with cryptocurrency holdings in their investment portfolios, need to understand the risk associated with cryptocurrency investments. Cryptocurrencies available in Source: www.coindesk.com.

Previous studies on cryptocurrency-economic growth relationships
The body of literature on cryptocurrency is expanding quickly nowadays. Researchers have focused in particular on the bitcoin market's potential as a risk management tool. Since it is a young asset class, future research paths will need to fill up any gaps in the existing literature. Particularly during times of greater economic uncertainty, investors either limit their investments, wait for the situation to stabilize, or look for appropriate ways to reduce uncertainty globally. Interestingly, during the period of more unpredictable occurrences, the cryptocurrency market emerged as a risk management tool for domestic and foreign investors of stock and commodity markets all over the world. There has been significant and different opinion on the role of cryptocurrency and its impact on financial innovation and the economy. Table 1 provides the systematic literature review of previous researchers on the aspect of the cryptocurrency-economy crux.
Despite the fact that cryptocurrencies are being used more frequently to purchase products and services as well as financial assets, the economic driving force behind this phenomenon is still up for debate. The majority of previous literature on cryptocurrency and economic performance has  (Chiu & Koeppl, 2017) The welfare costs should be pinned down with insight through double spending constraints and using costly mining of cryptocurrencies.
Bitcoin creates huge welfare loss to the economy which is about 500 times that of the monetary economy with 2% inflation.

(Lu, 2022)
Cryptocurrency negatively affects economic growth Cryptocurrencies are a good growth tool for poor nations, but only if their future use leads to an improvement in the level of financial knowledge required to access online resources.

2022)
Cryptocurrency trading sparked economic growth, which attracted more funding for advancing smart and environmentally friendly technology to reduce carbon emissions from economic growth.
Increasing cryptocurrency trading will improve economic growth and globalization. However, in the long run, the relationship between cryptocurrency and GDP is not confirmed. Cryptocurrency will give more impact on economic growth if it is treated as legal money in trading.
(Dasman, 2021) Cryptocurrency has given the highest returns compared to other investment instruments. Government should regulate and adopt cryptocurrency to secure investors and economic growth.

2021)
Study of cryptocurrency volatility is important in terms of financial instruments for hedging traditional assets, as well as in terms of pricing economic factors such as inflation and the Fed rate have a long-term negative effect on the price of Bitcoin.

(Leonard & Treiblmaier, 2019b)
Cryptocurrency may alleviate as a fundamental instrument for economic growth There is a need of political reforms and alternative currencies for sustainable economy.
focused on the development of prices and regulatory issues. Theoretically, an increase in uncertainty leads to information asymmetry making opaque characteristics of borrowers (Mishkin, 1992). It is quite difficult for lenders to differentiate between good and bad borrowers, leading to investment decline and correction in economic activity consequently. Different aspects of cryptocurrencies as digital assets have been investigated in finance, including risk-return characteristics (Ankenbrand & Bieri, 2018), returns volatility (Katsiampa, 2017) and transaction activity (Koutmos, 2018).
Most of the existing studies have focused on the volatility spillovers of the stock market and cryptocurrencies (Uzonwanne, 2021), cryptocurrencies as a backstop for the stock market (Jeribi et al., 2021), cryptocurrencies as a safe haven for the stock market (Conlon et al., 2020). Despite the wide literature on cryptocurrencies and their empirical relationship with the stock market, few empirical studies have dealt with the financial instability threats that cryptocurrencies possess on the economy. Thus, the main purpose of the study is to investigate the empirical relationship between cryptocurrency, financial stability and economic growth of India. The relevance of the study also stems from the fact that cryptocurrencies spur financial inclusions and the economy immensely.

Data source and type
Secondary data were collected from the World Bank database, also known as World Development Indicator (WDI) database, the policy uncertainty index, investing.com, and from Yahoo! Finance. Annual data for GDP growth rate, inflation rate, exchange rate, financial stability, and lending rate, collected from the WDI database were converted to quarterly data. Whereas, Bitcoin price, India volatility index and economic policy uncertainty were converted from monthly to quarterly data. The new dataset converted to quarterly produced longer time series, improve consistency, and improvised control as suggested by Hollis et al. (2019). Quarterly time series data from 2015 to 2022 of all the constructs, with a total of 32 observations were employed. Data originated in 2015 because bitcoin as a cryptocurrency was first introduced in October 2014. Other cryptocurrencies were excluded from the study investigation due to their lack of data availability and a maximum of them were launched in the recent five years since 2017. It also used quarterly data for lending rates as it precisely reflects the effect of monetary and macroeconomic policy from the central bank.

Authors
Findings Economic crux (Riley, 2021) Legalizing the cryptocurrency is hurdle due to issues like terror funding, illegal transactions and huge tax evasion.
Regulatory policies will shape the development of the global cryptocurrency market.
Significant relationship between cryptocurrency and stock market performance.
Cryptocurrency returns is an important determinant for stock market performance. Adoption of cryptocurrencies is uneven and is dependent on the national development.
Cryptocurrency adoption correlates positively with GDP and negative with the control of corruption. (Fakunmoju et al., 2022) Cryptocurrency trading is poised with unlawful and unregulated practices Cryptocurrency have negative effect on the economic performance. Support for the cryptocurrency adoption is high in developed banking service locations Cryptocurrency adoption is driven by its usefulness and engaged in illicit trading.
(Yue et al., 2021) Cryptocurrency investigation will remain the hotspot of investigation in the economic literature. Cryptocurrency markets will be less dependent on the traditional financial markets.

(Yen & Cheng, 2021)
Economic policy uncertainty change predicts cryptocurrency volatility in China. Regulatory approval on cryptocurrency trading will impact the cryptocurrency volatility. (Symss, 2023) Cryptocurrencies can be alternative to the traditional financial instruments during the financial crisis.
Accepting cryptocurrencies as a means of exchange can be considered as an alternative investment purpose to boost economic growth.

2020)
Cryptocurrency are not the safe haven for the economic growth and the equity markets.
Cryptocurrencies are poised with technological, security and liquidity risk that creates issue for the economic stability. (Abdeldayem & Aldulaimi, 2020) Cryptocurrencies are riskier to invest than in the equity market. The development of digital currencies will support efforts to expand the economy financially

Model description
Following Mbilla et al. (2021), this section specifies an appropriate model for the analysis determining the link between financial stability, macroeconomic stability and cryptocurrency. Financial stability and GDP growth rate were represented as the dependent factors, whereas, bitcoin was the independent factor, and the exchange rate, inflation rate, lending rate, risk-free rate, India volatility index, and economic policy uncertainty were used as control variables for the model.
The regression relationship of the model is stated as: where z_scores in eq (1) is the proxy for the financial stability used as a dependent variable, BTC represents the cryptocurrencies, i indexes the country, t represents the quarterly time.
Other macroeconomic (economic volatility uncertainty, exchange rate, inflation rate, lending rate, risk free rate) and market-related (Market volatility index) variables were also employed in the modeling framework. Similarly, GDP in eq (2) is the proxy for the economic growth used as a dependent variable.

Bitcoin as cryptocurrency
Bitcoin was first introduced by a code developer named Satoshi Nakamoto, and it was then conceived as a decentralized digital currency validated by cryptography (Gopane, 2019). Since then, bitcoin has been attractive to traders as a means of exchange. Bitcoin was represented as the main cryptocurrency and is described in US Dollars. Bitcoin is a digital asset that operates free of any central control and relies on peer-to-peer software and cryptography (Xu et al., 2017). A bitcoin transaction is kept private with the help of cryptography and is electronically signed (Al Kawasmi et al., 2015). In early October bitcoin started trading officially on the online platform and reached the price of $123 by December 2014. Thus, this study included the data for bitcoin from 2015Q1 till 2022Q4. Table 2 describes the variables used in this study and the sources of these variables. Amongst the different cryptocurrencies, only Bitcoin was chosen due to its popularity and maximum market capitalization in the global as well as the Indian cryptocurrency market. Data for Bitcoin was obtained from the official website www.coinmarketcap.com.
Financial stability for India was calculated using the z-score value retrieved from the WDI database. Z-score is the common measure of stability at the level of individual institutions or countries. It compares returns or capitalization with the risk to measure a bank's solvency risk. The probability of insolvency is low when the z-score level is high. Many previous studies (

RESULTS
Empirical analysis using time series secondary data was performed for the quarterly data from 2015 to 2022. To test the associations between the dependent, explanatory and control variables, it is important to confirm the stationarity through the integration of order one. To confirm the stationarity, unit  root tests by applying Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) were inspected. The empirical results in Table 4 show that there is no stationarity in all the variables at the level, thus accepting the ADF and PP hypothesis. However, at the first difference, the ADF and PP hypotheses were rejected confirming there is stationarity for all the variables. In the next step, the correlation between the variables as available in Table 5 was examined. The results indicated that there is a negative association between bitcoin price and financial stability. Meanwhile, exchange rate, GDP growth and the Indian volatility index were found to have a pos-itive association with bitcoin price. Furthermore, the exchange rate is negatively correlated to financial stability and GDP growth. In addition, GDP growth was also having a negative relationship with the inflation rate.
A co-integration test was performed to check the long-term association between the variables. Long-term effect of bitcoin on financial stability and economic growth and other macroeconomic factors discussed in this study are expressed quantitatively, and it can be said that there is a strong interaction with each other. The results of FMOLS and CCR model estimation with financial stability as a dependent variable are presented in Table  6. The result finds that there is negative and significant cointegration between financial stability and bitcoin (β = -5.73, p < 0.001), indicating that in the long run, cryptocurrencies may contribute to the monetary and financial instability of the country if they were to spawn a large and unregulated financial system and retail investor's protection. The interaction between financial stability and economic growth estimated that a 1% increase in economic growth would result in an increase of 0.15% in the financial stability of the country. When the effect of the exchange rate is considered, it can be estimated that a 1% increase in the exchange rate would yield to decrease of 0.10% in financial stability. The results obtained are similar to previous studies (Eichengreen, 1998;Golovnin & Oganesian, 2018), which mentioned that exchange rate volatility may decline the financial stability or stress of a country. The cointegration between economic volatility uncertainty and financial stability was not significant, indicating that in the long run, economic uncertainty is Note: 1) Bitcoin; 2) Exchange rate; 3) Financial Stability using z-score; 4) GDP Growth; 5) Inflation rate; 6) Lending rate; 7) Risk free rate; 8) India volatility index; 9) Economic volatility index uncertainty.
unable to destabilize the Indian financial system. Indian financial system displays resilience because they came into the epidemic with relatively solid balance sheets that were bolstered by greater liquidity buffers and stronger capital. Losses have been manageable, and unlike during the global financial crisis (GFC), when banks deleveraged and reduced lending, global bank lending has remained strong. It is reassuring to note the stability of these institutions' fundamental solvency and liquidity positions. Furthermore, inflation was found to have strong negative cointegration on financial stability estimating 1% increase in the inflation rate would yield to decrease the financial stability by 1.65%. Reflecting the uncertainty due to the COVID-19 pandemic and war, rising interest rates in response to hardening inflationary pressures will further tighten the financing conditions. Table 7 presents the cointegration test for the variables with GDP growth as a dependent variable.
The study findings divulge that cryptocurrencies are subjected to have a marginal effect on economic growth in the long run. However, financial stability was having strong cointegration with economic growth. The interaction between financial stability and economic growth is estimated that a 1% increase in financial stability would yield to increase of 3.45% in economic growth. Despite a hostile foreign climate, the Indian economy and local financial system continue to be strong and resilient thanks to solid domestic macroeconomic fundamentals. The Indian financial system is well-positioned to help the economy grow due to strong capital buffers and rising asset quality levels. The interaction between the exchange rate and economic growth estimated that a 1% increase in the exchange rate would result in an increase of Table 6. Long-run model estimation with financial stability as a dependent variable Source: Calculated by the author using the EViews-12 software.  Similarly, other macroeconomic factors like inflation rate, lending rate, volatility index and riskfree rate have strong cointegration with economic growth. Due to an increase in global financial stability risks, the macroeconomic and financial developments of India have posted a modest improvement. However, due to overwhelming geopolitical tension, maintaining macroeconomic and financial stability would be a great challenge for central banks over the world.

FMOLS estimation CCR Coefficients t-statistics Coefficients t-statistics
The results from the long-run model show that all the determinants have cointegration with financial stability and economic growth, except economic volatility uncertainty. Bitcoin representing cryptocurrency was found to have a negative relationship with financial stability. This result indicated that a 1% increase in cryptocurrency will decrease a country's financial stability by 5%. Although there have been no big defaults by financial institutions as a result of the recent considerable volatility of crypto-assets, the risks of these events are growing. The coefficient of GDP is positively significant with financial stability at a 1% significance level. Where a 1% increase in GDP growth increases financial stability by 0.15%. Greater financial stability could result from faster economic growth. On the other side, increased inflation or unstable prices could hurt financial stability. The coefficient of the exchange rate was negatively related to financial stability at a 1% significance level. Where a 1% currency depreciation increase would decrease the financial stability by 0.10%. The findings imply that the exchange rate significantly influences the net worth and credit availability of Indian non-financial enterprises.
The results of the inflation rate indicated that a 1% increase in the inflation rate decreases financial stability by 1.65%. Significant inflation surprises can cause market volatility and raise the likelihood of an uncontrolled asset revaluation. Market participants attempt to predict how central banks may react to preserve price stability when faced with an inflation shock. Furthermore, the real value of outstanding debt may reduce with a high-er-than-expected increase in inflation. The result of economic volatility uncertainty and financial stability was not significant at the 1% level indicating that economic volatility uncertainty has a greater impact on financial stability in nations with higher levels of competition, lower levels of capital adequacy, and weaker financial systems.

DISCUSSION
This study analysis focused on the cryptocurrency, financial stability and economic growth integration. Such a study is valuable because it clarifies what policy makers might prioritize in light of the particular confluence of economic factors present in their country environment. Recent shreds of evidence on the inconclusive findings of cryptocurrency affecting the financial stability and economic growth, is an academic puzzle. Although crypto have made great progress in recent years, especially during COVID-19, they are still divisive in many countries; some hail them as the Web 3.0 of the future, while others paint them as a haven for criminal activity. Cryptocurrency is seen by some as a new fintech trend, and by others as a paradigm shift that challenges the social, political, and economic foundations of society. Some people believed that the buzz around cryptocurrencies was the work of investors and tech enthusiasts. In particular, Leonard and Treiblmaier (2019b) look at how the demand for debt-based money as a medium of exchange may be reduced by cryptocurrencies, easing a key institutional engine for economic growth and facilitating the upkeep of a stable steady-state economy. Similarly, Riley (2021) concluded that majority of countries are reluctant to legalize this payment method because they worry about issues with tax evasion, terrorism financing, and other unlawful transactions. However, the debate over the legalization of cryptocurrency has recently intensified. Governments are aware that despite the lack of legal framework, there are considerable amounts of cryptocurrency transactions taking place on the illegal market.
In line with the findings of (Bhimani et al., 2022; Riley, 2021), cryptocurrency could impact economic growth in the short and long run if it is treated as legal currency tender. However, Bhimani et al. (2022) finds that adoption of cryp-tocurrencies could negatively impact the economic freedom index and corruption perception index. The likelihood of cryptocurrencies replacing fiat currency in the Indian economy is relatively low. In recent years, cryptocurrency has significantly altered the Indian financial industry and disrupted the country's established traditional banking structure. Although the effects are still being felt, the rising investor interest in cryptocurrencies may have an impact on the economic environment of the nation. Therefore, the administration should not just recognize that regulations themselves influence the economy but also pay attention to the consequences of the volatility caused by frequent reforms in the financial system. This is because economic policy uncertainty has a significant influence on investor sentiment and financial stability. Therefore, while creating policies, the government should carefully assess whether they are consistent with the actual norms of society and should pay closer attention to how frequently policies are released and changed. The inflation outlook continues to raise concerns, and some market segments have overvalued assets. Despite rising funding costs, emerging and frontier markets still have significant financing needs. Some nonbank financial organizations are experiencing increased risks as they strive to increase yield to satisfy return objectives. Cryptocurrencies may impair capital account control in developing economies, which may affect the management of exchange rates. In addition, disintermediation from the established financial system caused by cryptocurrencies can undermine financial stability.
Finally, going forward aggressive monetary policy tightening, volatility in capital flows and exchange rates, de-anchoring of inflation expectations, faltering in the economic recovery, disruptions due to global supply chains and climate change will be the major risks to the financial stability of India.

CONCLUSION
This study explored the relationship between cryptocurrency, financial stability and economic growth in India for the period 2015Q1-2022Q4. The study utilized eight different financial determinants including bitcoin, exchange rate, economic volatility uncertainty, inflation rate, volatility index, lending rate, and risk-free rate to analyze its impact on financial stability and economic growth. FMOLS regression analysis was performed to explore the relationship whereas; canonical cointegrating regression (CCR) was estimated for the robustness of the model. From the findings it can be concluded that increased financial institution involvement could accelerate the growth of crypto-assets and raise the risks to financial stability. The rising options provided by cryptocurrency exchanges for investors to enhance their exposure through leverage could heighten the threats to financial stability. According to estimates, leverage on crypto assets has significantly increased in recent years. In addition, financial stability can aid monetary policy by enhancing growth and inflation's reaction to changes in interest rates. Regulators should make sure the system runs smoothly and support regional growth. A prerequisite for sustainable economic development is consequently the soundness of financial institutions. The empirical findings show a correlation between India's economic development and a better level of financial system stability. Therefore, strong economic performance is encouraged and is favorably predicted by financial stability. With tighter US monetary policy and a greater depreciation of the rupee against the dollar, credit conditions for businesses often deteriorate. While it may be beneficial to counter US monetary tightening with higher domestic interest rates to slow rapid currency depreciation, doing so is likely to result in more output volatility.
Furthermore, the results also identified positive and significant cointegration between economic growth and financial stability. Since most transactions in the economy are carried out through the financial system, it is paramount for economic growth. Financial instability may lead to bank runs, a stock market crash, and hyperinflation, and it can severely shake financial and economic confidence. The latest Global Financial Stability report in 2021 by International Monetary Fund (IMF) described the risk posed by the crypto ecosystem due to a lack of strong operational, governance and risk practices. Thus, it is rec-