RBI's proposed digital currency project and what it means for you

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The Reserve Bank of India (RBI) mentioned in a recent note that it is working to create its own digital legal tender, which is backed by the state.

This is not the first time that such an initiative has been spoken about by the central bank. Statements have been made in the past about putting RBI’s very own cryptocurrency in place. But on that front, apart from occasional remarks made by the top executives of the bank, nothing major has taken place.

While the RBI listed the need for a digital currency of the central bank (CBDC), it added that regulators and the government continue to be apprehensive about the related cryptocurrency threats, for good measure.

So, why is the government not banning currencies like that? Why did the Supreme Court overturn a ban on crypto-exchange banks?

Moneycontrol is trying to find some replies here:

Let us get to the basics first. What exactly are cryptocurrencies, and how is the Indian Rupee (INR) or the US Dollar (USD) different from them?

Broadly speaking, as opposed to standard currencies in use worldwide, which are all backed by sovereign guarantees, cryptocurrency can be defined as a private currency. For example, a note of Rs 100 bears a pledge that the piece of paper is worth Rs 100, guaranteed by the RBI Governor.

There are no such sovereign guarantees in the case of crypto-currency.

Instead, the value of crypto like bitcoin is backed by complicated, stable code, can not be individually changed by someone, and includes several value checks and balances. So, the simplest way to understand crypto is that it is a type of currency that can be transferred from one person to the other through the internet.

So, the central bank now wants to create a cryptocurrency of its own.

The central bank wants its own digital currency to be created. A CBDC will have the support of the RBI and, in turn, the state, unlike privately held cryptocurrencies. This could take the form of simply converting a share of the economy’s total INR into a fully digital format, where no currency bills will back it up. It is only going to be in digital form, sponsored and issued by the central bank. It is not public knowledge exactly how far the RBI has advanced on this front, but this is something that is currently under assessment.

Is this going to make RBI the first central bank to do this?

Not at least at all. In fact, in comparison to many geographies, India is far behind in terms of crypto regulations. China has, for instance, been working for years on a digital currency. The Chinese central bank supports this and has the approval of the Chinese government. The digital currency is used for mobile purchases and is accepted on e-commerce websites, offline stores, and other outlets. The bank is collaborating with various local authorities in various parts of the world to press for its adoption.

Okay, so China has its own crypto-currency already?

Again, since the latter has certain basic features that can never be replicated by digital currencies, it is important to distinguish between CBDC and cryptocurrency. By essence, Crypto is working on the underlying concept of anonymity. In the case of a digital currency, the central bank would be completely monitored, just like a regular currency.

Second, a decentralized cryptocurrency. There is no one person with authority over the currency. Thousands of computer geeks and traders around the world verify and exchange it, and it is backed by the underlying blockchain technology. In this case, a digital currency is just a centralized tender format that is digitized. China, for example, has transformed a portion of its Yuan deposits into a digital format and distributed it to the market.

But are we not already using, via UPI, QR codes, or cards, some form of digital currency?

All right, this is where it could get a little complicated, but it’s not exactly the same response. Any transaction made is sponsored by a currency note somewhere in the event of UPI or card payments. Such transactions are made via bank deposits, and all of these deposits are backed by banks’ INR notes. In other words, a person can simply walk to a branch of a bank or an ATM and turn his bank balance into currency notes. That would not be possible in the case of a digital currency, because it is all digital and there are no bills anywhere to sustain the currency. It works to develop the confidence of citizens in the country’s banking system.

Wow! In one go, that’s a lot to absorb, but I have a burning question, why do I bother about another new currency form?

That is the issue of the million-dollar. Ask any top Indian banker or regulator and they have a similar crypto response: what is the one issue that crypto solves that can not solve fiat currencies like Dollar or INR? Perhaps the solution lies in the change in the balance of power. It takes power away from a central authority and distributes it to the people, philosophically speaking. It brings into question the power of the state and the central banks, and the present financial system that is changing the globe. Bankers, on the other hand, agree that digital payments and advances in instant fund transactions are sufficient to accelerate global financial inclusion.

Last question, what is the legal status of cryptography in India?

Crypto is neither illegal nor legalized in India, making it hang in the grey zone somewhere. The RBI barred banks from dealing with crypto-exchanges, but the Supreme Court of India overturned the embargo in March 2020. There is a bill pending with Parliament seeking to render selling, possessing, or keeping some sort of cryptocurrency illegal, but the light of day is still to be seen in that draft legislation. So, technically, crypto exchanges are actively operating across the country, doing their own due diligence, and mostly operating as trading platforms.