For several months, my stand on cryptocurrencies, assets, and exchanges has been unambiguous and unwavering — that they should be banned outright, without further ado or delay; instead, a comprehensive regulatory framework should be built around the Central Bank Digital Currency (CBDC). The government has responded along the lines, which I had advocated; it is set to introduce in the winter session of Parliament, the Crypto bill that will effectively make CBDC a legitimate cryptocurrency.
This currency will be issued and regulated by the RBI and will have an inherent value equivalent to its denomination. This will remove confusion around using privately issued digital tokens as cryptocurrency. More importantly, the CBDC will be based on distributed ledger technology and will follow data localisation norms. This will enable these transactions to be tracked and taxed as required under the law. The biggest challenge of privately issued crypto tokens masquerading as currency was that they were not regulated. As a result, there was no guarantee about their value. CBDC will have an inherent value and will not be volatile plus stablecoins can be issued linked to CBDCs.
The distribution of CBDCs may be allowed by private players so that their usage can be further increased. Especially for cross border transactions making them easier, seamless and almost cost less. This will help enormously with even small value payments and give a fillip to safe cross border transactions.
The Reserve Bank of India is going to launch a pilot project to test the efficiency, efficacy and usage of the CBDCs. Most likely after the winter session is over, this will allow the regulator to define some of the terms of distribution and interoperability. The CBDC has to work across platforms; its usage has to be promoted by private distributors. The pilot is expected to iron out these challenges.
How the payment wallets like Paytm, Mobikwik and the banks take to the CBDC will be tested through the pilot project. If the payment wallets become a part of the CBDC they will get a piece of the wholesale transaction business that has till now been the purview of the traditional banking system. This will open the export financing and international transactions ecosystem that has been the monopoly of a few foreign banks.
There are big questions around whether the crypto-exchanges in the country will support the CBDC or shift base to Singapore or other countries and keep selling their digital tokens as currency and investment options, even as the CBDC will become the de jure digital currency. The bigger question about crypto tokens as an asset class will also be addressed. The bill is likely to suggest a framework for crypto assets though the original draft had completely banned its usage. That’s because use cases for blockchain exist that point to an improvement in the accuracy of data, transactions or tracking, trade financing, post trade reporting, and detecting fraud. In such cases, the tokens may be allowed as assets but such use will be governed by strict laws including KYC, counter party guarantees and promises made of returns. This was missing in the earlier draft.
It is unlikely that offshore crypto assets will be allowed to be sold in India as a legitimate asset class. There was a clear demarcation and definition of foreign crypto currency in the draft bill. This is what is said in the draft bill of 2019, “The foreign digital currency recognized as foreign currency in India shall be governed by such regulations as may be notified by the Reserve Bank under the relevant provisions of the Foreign Exchange Management Act, 1999 (Act No. 42 of 1999).” Hence, ethereum or bitcoins issued abroad will be governed by FEMA Act, will need disclosure, and will attract taxation.
Derivative tokens on CBDC as assets are likely to be permitted as the market develops and the RBI thinks it makes sense.
The initial draft of the crypto bill of 2019 defined cryptocurrency in the following terms: “Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.” The definition distinguishes the official digital currency or CBDC from other privately issued digital tokens. Whether this definition has been revised in any manner to allow stable coins or tokens linked to the CBDC is yet to be known.
In sum, the response of payment wallets, banks, crypto exchanges as well users and investors is a crucial issue for the success of CBDC and stablecoins. Its interoperability in the real world is the next step to make it successful. The bogey of false currency will be buried.
The author is a senior journalist and associated with a think tank based out of Gurgaon. The views expressed in this article are those of the author and do not represent the stand of this publication.