India’s Crypto Economy-Can RBI’s CBDC Counter Bitcoin?
The RBI maintains that popular cryptocurrencies such as bitcoin and ethereum do not have the intrinsic value of a ‘proper’ currency.
Think digital payments in their current formats — say, the UPI or the digital wallets, and it becomes evident that we are still stuck with the conventional banking system. Yes, we no longer do physical transactions, but we still need our bank accounts or balance in our credit cards to enable digital payments. But what will happen when India’s central bank issues a digital currency, much like the widely used private virtual currencies minus their volatility and misuse?
“The Central Bank Digital Currency, or CBDC, can be transacted instead of bank balances as if cash has been handed over, and the need for interbank settlement disappears,” said the Reserve Bank of India, explaining how CBDC would work.
Although this digital currency will be introduced in a phased manner, the RBI still seems to be struggling with the technology, legal framework and cybersecurity issues.
In a recent speech, T Rabi Sankar, the RBI deputy governor, clarified the central bank’s stand on digital fiat currencies and why these are entirely different from the existing cryptocurrencies.
His speech brought forth the following key points:
- The RBI recognises the need of having digital currencies amid the increasing popularity of cryptocurrencies.
- It envisions India’s CBDC as a fiat currency, exchangeable one-to-one with the INR fiat currency.
- The RBI does not perceive the existence of popular cryptocurrencies such as bitcoin or ethereum as ‘currencies’ as these are not backed by issuers like central banks and are not convertible one-to-one into the fiat currency.
- The RBI is currently working towards a phased implementation strategy and examining use cases that can be implemented with little or no disruption (for example, retail payments).
- The central bank is still exploring the pros and cons.
The central bank has also expressed the need for a legal framework to start the evaluation and pilot project on CBDC. However, the long-pending Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is yet to be tabled in Parliament.
Commenting on the latest development, Gaurav Dahake, the founder and CEO of Bengaluru-based crypto exchange Bitbns, said, “Even with a digital currency (CBDC) in place, there will still be some ambiguity in terms of how it can be governed or controlled. In the case of digital currency in the wake of an episode such as demonetization, the government can take immediate action by reducing the money floating.”
Welcoming the strategy of phased implementation, Nischal Shetty of WazirX said, “We already have a few global references of similar use cases. It means a CBDC can be helpful, but it solves totally different problems compared to what the existing crypto assets are doing.”
In spite of recognising the technology and the scope cryptos have created, the RBI has yet again expressed that the likes of bitcoin and ethereum do not have the intrinsic value that a traditional currency has and, therefore, they must not be confused with currencies.
Tweet Of The Week
After the Reserve Bank of India forbade banks to extend their services to crypto entities via a notification dated April 6, 2018, most crypto startups in India started to shut down their operations. However, Nischal Shetty, founder of the homegrown crypto exchange WazirX (the company was acquired by Binance in 2019), started a Twitter campaign called #IndiaWantsCrypto on November 1 that year. Although the Supreme Court has already struck down the central bank’s clampdown on crypto, Shetty still runs the campaign, hoping to usher in a favourable regulation that will trigger a crypto boom in the country. Yesterday marked the 1,000th day of the campaign.
India’s Crypto Economy is a brand-new weekly newsletter (delivered every Thursday) from Inc42 to help you decode the rapidly growing crypto economy and its implications on business, work and life. We launched this newsletter on the 4th anniversary of our weekly series “Crypto This Week” which completed 190 editions in May, 2021.