Lately, cryptocurrency has seen growth, albeit with some scepticism and resistance. Over a decade after Bitcoin’s dawn in 2009, the total transaction value of cryptocurrencies has exceeded US$3 trillion worldwide.
Under the RBI’s circular dated April 6, 2018[1], all RBI regulated entities were prohibited from dealing in or settling cryptocurrencies. However, the judgment of the Hon’ble Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India, set aside this circular.
Legislative Update
The global upbeat around cryptocurrencies has precipitated the need of local governing law for easy and efficient governance. The Cryptocurrency and Regulation of Digital Currency Bill 2021 (“Regulation”) was presented in the Winter Session of the Lok Sabha that prima facie seeks to ban all private cryptocurrencies while suggesting the introduction of an official digital currency issued by the RBI. Regulation is on hold for discussions. The legislators believe that a governance model based on global reaction to cryptocurrencies may be introduced in India.
Hon’ble Prime Minister Narendra Modi, while addressing World Economic Forum’s Davos Agenda, called for a collective global effort against cryptocurrencies as the decision taken by a single country will be insufficient to deal with the challenges of the cryptocurrency technology. He suggested that global democracies need to have a similar mindset.
India’s first Regulated Digital Currency
The introduction of crypto assets could eliminate intermediaries in the traditional banking infrastructure. However, the Indian government and the RBI have cleared the position by stating that the Regulation will only allow the possession of cryptocurrency as an asset and not be used as a legal tender for payments or settlements. The Regulation proposes the creation of a crypto equivalent of the country’s fiat currency known as the Central Bank Digital Currency (“CBDC”) by the RBI.
According to a Bank of International Settlements report, CBDC enjoys a combination of features of the unregulated cryptocurrency and the heavily regulated traditional currency. The report[2] also states that to date there are only two live retail CBDCs, one of The Bahamas called The Sand Dollarand the other of The Caribbean known as The DCash.
The RBI is proposing two types of CBDCs – retail and wholesale. CBDC will provide a convenient, safe, and robust alternative to traditional money in its basic form. Benefits to the users will include liquidity, scalability, acceptance, faster settlements, and ease of transactions with anonymity. It is different from other popular cryptocurrencies such as Bitcoin since with the backing of the RBI, CBDC comes with a pre-determined value that other cryptocurrencies lack and can double up as a financial instrument.
As an RBI regulated token, CBDC potentially may overcome volatility, unaccountability, and proclivity to money laundering associated with cryptocurrency.
Benefits of CBDC
CBDC may also be used as a ‘fit for purpose’ money for social benefits and other targeted payments in the country. The RBI can pre-program CBDC for use for a specific purpose. For example, pre-programmed CBDCs for LPG subsidies as direct benefit transfer (“DBT”), accepted only in authorised LPG agencies, and be declined for use in other areas, will minimise leakage in the subsidy programme.
One key feature could enable faster cross-border remittances. This can be unlocked with infrastructure and arrangements for CBDC transfer and conversion, which will require international collaboration with significant economies, worldwide. It would also require the inter-operability of CBDC across various jurisdictions for quick transfer. This arrangement may enable CBDC remittances in real-time, significantly reducing the transaction time for the receipt.
A highly secure mode of CBDC for cross-border transactions would combat financial terrorism (“CFT”). The Distributed Ledger Technology (“DLT”) eliminates post reconciliation requirements expediting high-value transactions. CBDC can also be a tool for offline payments through digital tokens. The offline wallet could be separate and based on near-field communication (NFC) technology, with NFC enabled device using digital wallet and application for peer-to-peer payments in “no” network areas.
Micro, Small, and Medium Enterprises (“MSMEs”) in India can benefit from CBDC for instant lending of funds during a cash crunch. Banks would be able to assess an accurate borrower risk profile as more MSMEs start using CBDC under a centralised system. Since CBDC is traceable, it will help MSMEs prove their creditworthiness and lead to significant transparency and offer resilience to forgery.
Way Forward
Lack of governing legislation makes the FinTech industry hesitant to adopt crypto transactions. Companies like Google Pay, Samsung Pay are considering the way into the crypto world with BitPay. Tesla, MasterCard, PayPal, and MicroStrategy are also actively adopting cryptocurrencies in their system. Paytm has also shown an interest in offering services around cryptocurrencies on its platform after it receives regulatory sanctity in India. CBDC could well be the first step towards crypto inclusion with much scope for innovation and growth in the industry.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
[1] Reserve Bank of India – Notifications (rbi.org.in)
[2] To Date, there are Just 2 Live Retail CBDCs Globally, Says the Bank of International Settlements (BIS) July 2021 Report | BitcoinKE