Indian central bank’s digital rupee could pave the way ahead for country’s crypto ecosystem

FILE PHOTO: A representation of virtual currency Bitcoin and U.S. One Dollar banknotes are seen in front of a stock graph in this illustration taken…
FILE PHOTO: A representation of virtual currency Bitcoin and U.S. One Dollar banknotes are seen in front of a stock graph in this illustration taken…
Image: REUTERS/Dado Ruvic
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After giving a cold shoulder to cryptocurrencies for years, India’s central bank is finally set to launch its own digital currency, and investors in the country have a reason to cheer.

On July 22, Reserve Bank of India (RBI) deputy governor T Rabi Sankar said the regulatory body is considering introducing a central bank digital currency (CBDC) in a phased manner. A CBDC is a legal tender issued by a central bank in a digital form. In effect, it is just a digital version of the fiat currency, which in India’s case is the rupee.

This means a CBDC is not the same as private virtual currencies such as bitcoin, ether, or dogecoin.

“CBDCs are desirable not just for the benefits they create in payments systems, but also might be necessary to protect the general public in an environment of volatile private virtual currencies,” Sankar said in his keynote address(pdf) during a webinar organised by the Vidhi Centre for Legal Policy, New Delhi. “Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option… CBDC is likely to be in the arsenal of every central bank going forward.”

In the past, the RBI and the Indian government have had a tough stance on cryptocurrencies. In fact, not too long ago, banks in the country were temporarily barred from dealing in digital coins.

While the announcement about CBDC does not exactly mean that the RBI has changed its heart about cryptocurrencies of all kinds, it might benefit the entire ecosystem.

“The digital currencies issued by the central banks differ on one fundamental aspect of cryptocurrencies and that is decentralisation. That being said, digital currencies would undoubtedly create awareness among the masses,” Edul Patel, CEO and co-founder of San Francisco-headquartered crypto trading platform Mudrex said. “It would ultimately help more people to participate in the cryptocurrency markets.”

RBI’s CBDC and India’s cryptocurrency ecosystem

RBI’s CBDC plans have been in the works for a while now.

In 2018, a panel constituted by former finance minister Arun Jaitley had proposed the concept of CBCD for the country. This was mainly because policymakers in the country liked blockchain technology, even as they have never praised cryptocurrencies.

In February 2020, the RBI had said institutions in India must understand the potential benefits and risks associated with distributed ledger technology to reap the benefits of digital innovation (pdf). In January this year, the RBI mentioned the need for a CBDC stating that in case the need for a digital currency came up, it will look for ways to operationalise the currency.

Separately, in 2019, the government had announced its Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which aims to prohibit all private cryptocurrencies in India and to create a framework for official digital currency to be issued by the RBI. Last month, finance minister Nirmala Sitharaman reportedly said the bill was ready to be introduced in the ongoing monsoon session of the parliament. Interestingly,  however, the government did not list it on the agenda for the session.

There is now a growing belief that there will be no outright ban on private cryptocurrencies in India. However, Indian authorities will not allow private cryptocurrencies to be used as legal tender either, a source-based report in news portal Moneycontrol said in July. Cryptocurrencies are likely to be treated as tradeable assets like commodities or art.

Earlier this year, the RBI’s annual report on currency and finance (pdf) said sovereign-backed digital currencies could be designed to promote non-anonymity of monetary transactions and financial inclusion by direct transfers.

RBI’s decision on CBDC “clearly showcases the value of cryptocurrency or blockchain. At the end of it, the RBI is using blockchain to create a form of the currency,” Gaurav Dahake, CEO and founder of Indian cryptocurrency exchange Bitbns, said. “In effect, it validates that the use of blockchain to have governance over financial aspects of the country is valuable…The RBI would want a base layer control on cash circulation in the system.”

Status on central bank digital currencies globally

On July 14, the European Central Bank launched its digital euro project, approving an “investigation phase” that could ultimately lead to a virtual currency being implemented later in this decade.

Most major central banks have followed China where the digital yuan has already been in circulation in several cities. The US Federal Reserve and the Bank of England are also looking into the possibilities of digital currency for their economies.

Around 86% of global central banks were actively researching the potential for central bank digital currency, while 60% were experimenting with the technology and 14% were launching pilot projects, according to a survey by the Bank for International Settlements (pdf).