RBI plans to introduce Central Bank Digital Currency (CBDC)

RBI plans to introduce Central Bank Digital Currency (CBDC)

• The Reserve Bank of India is likely to soon kick off pilot projects to assess the viability of using digital currency to make wholesale and retail payments to help calibrate its strategy for introducing a full-scale Central Bank Digital Currency (CBDC).
• India is already a leader in digital payments, but cash remains dominant for small-value transactions, he said, stressing that an official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
• Some key issues are being examined: whether they should be used in retail or wholesale payments, the underlying technology, if the validation mechanism should be token-based, etc. Conducting pilots in wholesale and retail segments may be a possibility in the near future.
• A high-level inter-ministerial committee set up by the Finance Ministry had recommended the introduction of a CBDC with changes in the legal framework including the RBI Act, which currently empowers the RBI to regulate issuance of bank notes.
• India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC — to the extent large cash usage can be replaced by CBDC, the cost of printing, transporting and storing paper currency can be substantially reduced.
• The advent of private virtual currencies is another reason... If these private currencies gain recognition, national currencies with limited convertibility are likely to come under some kind of threat.
• Transacting with CBDC would be an instantaneous process as the need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another, Mr. Sankar pointed out. Moreover, foreign trade transactions could be speeded up between countries adopting a CBDC.
• They could enable a cheaper and more real-time globalisation of payment systems — it is conceivable for an Indian exporter to be paid on a real-time basis without any intermediary...The risks of dollar-rupee transactions, the time zone difference in such transactions would virtually disappear.

About Cryptocurrency

• The government intends to bring in a law on cryptocurrencies to put an end to the existing ambiguity over the legality of these currencies in India.
• The government has, suggested that it does not consider them to be legal tender.

Disadvantages

• Such currencies are:
  • highly volatile,
  • used for illicit Internet transactions, and
  • wholly outside the ambit of the state — into any sort of regulation.

RBIs direction

• In 2018, the RBI did send a circular to banks directing them not to provide services for those trading in cryptocurrencies.
• Regulatory bodies like RBI and Sebi etc also don’t have a legal framework to directly regulate cryptocurrencies as they are neither currencies nor assets or securities or commodities issued by an identifiable user.

Supreme Court’s judgement

• But this was eventually set aside by the Supreme Court, which found the circular to be “disproportionate,” given that the central bank had consistently maintained that virtual currencies were not banned in India.
• Also, the RBI could not show that entities that it regulated were adversely impacted by exchanges dealing in virtual currencies.

So, what will the Bill seek to do?

• Cryptocurrency exchanges, which have sprung up, are reportedly lobbying with the government to make sure these currencies are regulated rather than banned outright.
• Smart regulation is preferable, as a ban on something that is based on a technology of distributed ledger cannot be implemented for all practical purposes.

Findings of India inter-ministerial committee

• Even in China, where cryptocurrencies have been banned and the Internet is controlled, trading in cryptocurrencies has been low but not non-existent, as an India inter-ministerial committee found out.
• Despite this and the fact that most countries it studied had opted for regulation, this committee still went ahead to recommend an outright ban.
• Of course, it encouragingly also batted for an official digital currency as well as for the promotion of the underlying blockchain technology.

Law to ban Cryptocurrencies

• India plans to introduce a law to ban private cryptocurrencies such as bitcoin and put in place a framework for an official digital currency to be issued by the central bank, according to a legislative agenda listed by the government.
• The law will “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India (RBI),” the agenda, published on the lower house website on Friday, showed.
• The legislation, listed for debate in the current Parliamentary session, seeks “to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses,” the government said.
• In mid-2019, a government panel recommended banning all private cryptocurrencies, with a jail term of up to 10 years and heavy fines for anyone dealing in digital currencies.
• The panel had, however, asked the government to consider the introduction of an official government-backed digital currency, to function like bank notes, through the RBI.
• The central bank had in April 2018 ordered financial institutions to break off all ties with individuals or businesses dealing in virtual currencies such as bitcoin within three months.
• However, in March 2020, the Supreme Court allowed banks to handle cryptocurrency transactions from exchanges and traders, overturning a ban that had dealt the thriving industry a blow.
• Governments around the world have been looking into ways to regulate cryptocurrencies but no major economy has taken the drastic step of placing a blanket ban on owning them, even though concerns have been raised about the misuse of consumer data and its possible impact on the financial system.

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