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The Reserve Bank of India is planning an upcoming bill that would, in turn, pass a law prohibiting private digital currencies and favouring a digital currency backed by the Reserve Bank of India, raising the question, “Where are digital currencies headed?”
The RBI has stated that it is “very much in the game” and is preparing to launch its own digital currency. “Central bank digital currency is still in the works. The RBI team is working on it, both on the technological and procedural fronts…how it will be launched and rolled out,” Governor Shaktikanta Das recently stated.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which prohibits all private cryptocurrencies and establishes the regulatory framework for the launch of a “official digital currency,” was scheduled to be introduced during Parliament’s Budget session but has been postponed while the government continues discussions with stakeholders. The Bill’s final draught is still in the works.
According to sources, the government is willing to support a digital currency backed by a central bank. “A fiat currency cannot experience the volatility and fluctuations that Bitcoin and other cryptocurrencies do. We’re keeping an open mind. An RBI official stated, “We are very open to a digital currency; the RBI is working on that.” Govt. officials and experts argue that cryptocurrency prices are too volatile to be used as a fiat currency – a government-issued currency that is not backed by gold or any other commodity – even though proponents argue that volatility will decrease with greater acceptance.
Uncertainty about the legal status of cryptocurrencies is unsettling and concerning for Indian investors, who, according to unofficial estimates, own approximately $1.5 billion (Rs 10,000 crore) in digital currencies. While existing investors may be given time to exit their positions in the event of a ban on trading, mining, and holding cryptos, the proposed legal structure may require investors and traders to declare their holdings and transactions retroactively.
According to the RBI, central banks are looking into DLT (Distributed Ledger Technology) for use in improving financial market infrastructure and according to a recent Bank for International Settlements survey of central banks, approximately 80% of the 66 responding central banks have begun projects to explore the use of central bank digital currency (CBDC) in some form and are studying its potential benefits and implications for the economy.
Several cryptocurrency-related start-ups have emerged in India, including Unocoin in 2013 and Zebpay in 2014. (Tracxn, 2019). However, the volatility of Bitcoin prices, as well as instances of fraud, have highlighted regulatory concerns, according to the RBI. The RBI has expressed concern about other cryptocurrencies, claiming that they can be used for illegal purposes and pose a risk to financial stability. After digital currencies were used in frauds, the RBI banned banks and other regulated entities from supporting crypto transactions in April 2018. The ban was declared unconstitutional by the Supreme Court in March 2020. Both the government and the RBI have stated that they have not authorised or issued regulations for any entity to deal with cryptocurrencies, and that individuals who do so would face penalties and are liable completely. The Reserve Bank of India has issued several warnings against dealing in cryptocurrencies.
Since mid-February, Bitcoin has gone through a period of drops and consolidation before reaching an all-time high of $61,000, indicating a larger trend.
While the current price increase can be attributed to increased institutional exposure to Bitcoin and global progress toward fostering a friendlier regulatory environment for cryptocurrencies, it is also the result of a large supply reduction combined with increasing demand.
We hope that the speculation about a cryptocurrency ban in India ends soon, and that the government takes note of the growing demand for Bitcoin among domestic investors, as Bitcoin has the potential to reach $100,000 by the end of the year.
Tarun Taunk
Chief Editor (IT Voice)
