Introducing Digital Rupee

Is this budget announcement a step to make or break the crypto boom?
Introducing Digital Rupee
"The finance minister while making this major announcement also lent support to the cryptocurrencies by stating that any income from virtual digital assets will be taxed at 30%."GK Layout Desk

At a time when the world’s central bankers are still deliberating upon the concept of central bank digital currencies (CBDCs), the union finance minister, Nirmala Sitharaman, in her budget speech announced the introduction of official digital currency in the financial year 2022-23.

However, the exact details about its regulations and launch timeline are yet to be announced.

The finance minister while making this major announcement also lent support to the cryptocurrencies by stating that any income from virtual digital assets will be taxed at 30%. The FM also said that gifts of virtual digital assets will also be taxed in the hands of the recipient.

Remarkably, the exponential rise in cryptocurrency transactions in the last one year led to hot debates over whether to ban them completely or allow them in some form.

It’s worth mentioning that the Reserve Bank of India (RBI) has been against any kind of support for the crypto market in the country’s financial system.

Even as the FM’s announcement is a shot in the arm of cryptocurrencies and hints at a legal framework to regulate these private virtual currencies, it is at the same time beginning a process of aligning the country’s monetary system with the future virtual environment grooming the financial systems around the world.

The idea of central bank digital currencies (CBDCs) was making rounds for the last few years. It was only due to the outbreak of the coronavirus pandemic that forced the central banks around the world to seriously explore the option of launching official digital currencies.

Basically, in the given environment when use of online services is gaining momentum and witnessing mass movement of people towards the online platforms to conduct various financial transactions, the need for a formal digital currency in the monetary system is being felt directly.

Amid this never-seen-before surge in online transactions, Central Bank Digital Currencies (CBDCs) have emerged as the most preferred alternative to lend support to the fast expanding online platform in a formal way. All over the world, banks, institutions, and governments are performing research and analysis on the economic and technical feasibility of introducing a new form of digital money and its impact on monetary and fiscal policy. Remarkably, a Bank of International Settlements (BIS) report states that over 80% of central banks are already researching CBDC.

It’s worth mentioning that the Central Bank Digital Currency (CBDC) is an electronic form of central bank money that citizens can use to make digital payments and store value.

In the Indian context, one can refer to CBDC as a Digital Rupee. It needs to be understood that a CBDC is not a crypto currency. It is the digital form of a legal tender, or you can call it a digital form of fiat currency that will ease financial transactions.

The RBI describes this Digital Rupee as something that will provide a safe, robust, and convenient alternative to physical cash. The apex bank’s report said that depending on various design choices, it can also assume the complex form of a financial instrument.

Precisely, CDBC or a Digital Rupee would be exchangeable one-to-one with the government-issued money. It is the same as the legal currency we use. The only difference is that it would be in a digital form. It’s fervently believed that Digital Rupee would increase the safety and efficiency of both wholesale and retail payment systems.

On the wholesale side, a central bank digital currency would facilitate quick settlement of retail payments. It could improve the efficiency of making payments at the point of sale or between two parties.

Precisely, it would be a challenging task for the RBI to issue Digital Rupee. It comes with a host of technological, legal and economic issues that warrant careful examination and planning. Of course, the apex bank would ensure that the monetary policy implementation and financial stability of the country is not be jeopardised while rolling out a Digital Rupee.

Remarkably, the introduction of CBDC is in line with the statement of the RBI Governor, Shaktikanta Das. By the end of last year he stated that the apex bank could come up with a pilot of its fiat digital currency. Earlier, during the last monetary policy review on August 6, 2021 Deputy Governor of the RBI, T Rabi Sankar, had said that the central bank is expected to launch a fiat digital currency by December.

Meanwhile, there are certain wrinkles attached with the digital currencies and need to be ironed out. Let me reproduce these issues pointed out by some experts. One, if CBDCs are indeed efficient disintermediation vehicles for retail savers, this could adversely affect bank deposits and eventually growth of bank credit.

Some central banks are contemplating ways of limiting retail and institutional CBDC holdings, through either hard limits or monetary disincentives. This needs greater public discussion.

Two, given the public preference for cash and the comfortable blanket of anonymity it offers, CBDCs have to create foolproof systems for privacy protection; recent developments have left the public wary of excessive state intervention in their lives. Three, central banks will have to figure out how to manage cross-border flows vis-à-vis CBDCs and the attendant volatility because these eventually impact inflation and growth. Other central banks have started experimenting with either retail or wholesale CBDCs.

Now, let us come to the heat which cryptocurrencies have been facing in India owing to the resentment of the RBI to grant it a legal status in the country’s monetary system. Here, it is noteworthy that launching fiat digital currency is not going to be a substitute for cryptocurrency. These are entirely two different things.

Interestingly, the cryptocurrency market globally witnessed a boom during the on-going pandemic and millions of new investors jumped into this private virtual market. One of the eye-catching scenarios is that traditional bank depositors have been lured to withdraw money from the banks and invest in cryptocurrencies for reaping the dramatic returns which these virtual currencies have been throwing in the way of its investors.

However, the huge risks associated with the private virtual currencies are mostly overlooked by the gullible investors as they are not told about the intensity of dangers prevailing in the crypto market. Crypto frauds have been rampant in 2021 and hackers stole cryptocurrencies worth millions of dollars during the year. If the year 2020 witnessed a mad rush of first-time investors in the crypto market, the year 2021 witnessed a huge surge in crypto-driven frauds and such scams have been the order of the day.

Now the FM has rolled out a process to provide regulatory framework to this fastest growing virtual currency trillions-dollar industry, the Indian investors (stated to be around 70 lakhs in number) holding cryptocurrencies in their investment portfolios can have a sigh of relief.

There are expert opinions which believe that cryptocurrencies can be used as a tool to strengthen national security, economy, currency, technology, and even foreign policy.

Taxing the crypto trading would now help the government in generating more revenue and that too at a time when pandemic has derailed almost all economic statistics around the globe. This is an opportunity in a crisis for the country to strike the chord to be a global leader in framing the regulations for the crypto market and also launching its own central bank digital currency.

(The views are of the author & not the institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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