The finance minister clarified that the digital rupee or the Central Bank Digital Currency (CBDC) will be based on blockchain technology
Of all the proposals that finance minister Nirmala Sitharaman presented in her speech as part of the Union Budget 2022-23, the announcement about the launch of digital rupee would have the potential to touch the lives of almost all Indians. While there was speculation about the digital rupee for very long, its contours were not known. The finance minister, in her speech, further clarified that the digital rupee or the Central Bank Digital Currency (CBDC) will be based on blockchain technology, the digital framework behind Bitcoin and other popular cryptocurrencies.
For those uninitiated into the world of cryptos, a CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Its legitimacy comes from the government’s sovereign guarantee. On the other hand, crypto-currency is totally different from CBDC. The fundamental characteristic of crypto-currency — created using highly encrypted cryptography — is its independence from government influence. As these virtual tokens have no inherent value and would have a value only till a buyer wants to buy them.
While the purpose of the digital rupee is to tap low-hanging fruits like reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk, the crypto currency is an entirely different animal. Prime Minister Narendra Modi was in the forefront of global attempts to tame this wild beast, which abhors regulations.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is yet to be introduced in Parliament, declared that its intent was "to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India and to prohibit all private cryptocurrencies in India." However, the finance minister’s proposal to tax gains from crypto assets at 30 per cent sowed seeds of confusion among people’s minds about the government’s intent. The investors wondered if taxation grants an implicit recognition to the existence of crypto currency. But many issues cropping up from the trade in crypto currency remain unaddressed.
One, unlike stocks or commodities, which have underlying assets, cryptos derive their value from people's trust in the technology. So this gives rise to this question: What would happen to people’s money if, for some reason, demand for cryptos crashes and its effect on people’s savings and the economy. Two, the Indian government still did not make the rupee fully-convertible currency and it still has significant influence on the flow of foreign currency. Will the government have the same sway over the money flow through cryptos trading?
While the intent behind the floating of cryptos could be to protect individual money from seemingly irrational decisions of a government, a seamless transfer of money could also prove to be conduit of terror financing and money laundering and threaten the very existence of the state. The government, therefore, should not allow an unregulated run for the crypto trading in India.