An Indian Crypto-currency on the Cards: RBI Proposes its Own Digital Currency – Research & Ranking

Crypto-currencies have for long been the subject of intrigue and adventure for speculators. Presently, there are more than 5,000 crypto-currencies (also sometimes called digital currency) globally with a whopping market cap of $1.52tn. Crypto-currencies so far have had a stormy relationship with Indian regulators.

RBI tried to ban crypto-currencies in 2018 fearing frauds and lack of regulatory framework. However, the Supreme Court revoked this decision in 2020, allowing the market to restart. The RBI then thought of taking a step further by introducing its own digital currency, which is still in the policy framing stage. Let us understand what this means.

What is a crypto-currency?

Investopedia defines Crypto-currency as a “digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend”. Crypto-currencies are generally not issued by any country’s Central Bank, hence they are shielded from government interference or manipulation. Bitcoin is the most popular cryptocurrency. The Top 10 most popular Crypto-currencies are as follows:

Top 10 global Crypto-currencies by Market Cap

The rise and rise of Bitcoin (USD)

Source: Coinmarketcap

Indians join the party, albeit late

Indian investors joined the crypto-currency party a bit late. Bitcoin, the most popular crypto-currency was launched in January, 2009. However, Indian interest in the currency picked up only in 2017, when it saw a huge breakout. It rallied from $964 on 1^st January 2017 to $19,167 on 17^th December 2017, a mind-boggling return of 20xs in less than a year. People started speculating in the currency and looked at it as a way to make a “quick buck”. Back then, no one looked at Bitcoins as a serious investing option, partly because very few people understood the concept fully.

RBI proposes an Indian crypto-currency, Supreme court disposes

The demonetization exercise of 2017 drove a push towards digital transactions, increasing Indians’ appetite for crypto-currencies. After remaining largely silent for few years, RBI finally issued a statement in 2017 highlighting the concerns associated with the sudden rise of crypto-currencies. In 2018, RBI passed a circular preventing all banks from dealing in crypto-currencies. However, in 2020, the Supreme Court of India lifted the ban on crypto-currency trading in India, citing a lack of sufficient proof of damage suffered by RBI due to trading in crypto-currencies. It also said that the RBI had not explored any less intrusive alternatives such as regulating crypto-currency trading or exchanges.

The pros of crypto-currencies………..

Crypto-currency offers several advantages vis-à-vis trading in equities or debt.

• Easy and transparent transactions – Minimum paperwork, complete transparency with audit trails

• Less transaction fee – compared to traditional forms of investing

• More security – A crypto-currency transaction is almost impossible to hack or tamper (till now). Also, the transaction cannot be reversed

• No need for third party – A crypto-currency transaction involves only two parties – sender and receiver. No third party is involved. Also, no monitoring happens.

• Swift international transactions – People across the globe can make one-to-one transactions without complicated formalities or fees.

• Round-the-clock availability — Available for trading all 24 hours a day, 7 days a week

The Cons of crypto-currencies………..

• Scalability – There is currently a mismatch between number of digital coins, adoption of the currency, and increasing number of transactions. It is still much lower than the number of transactions processed by VISA compared on a daily basis. The ramping up will take time.

• Lack of inherent value – A crypto-currency is not linked to any tangible or intangible asset, hence there is no basis for the valuation (prices) of a currency, apart from demand. Hence, volatility is high. Legendary investor Warren Buffet has been strongly against any form of crypto-currency, saying “Crypto-currencies basically have no value and they don’t produce anything. I don’t own any crypto-currency and I never will”.

• Lack of regulations – Presently, crypto-currencies are not regulated by any Governments, hence changing of rules or protocols, especially when any new technology gets adopted, can become an issue.

• Potential security threats – While there have not been many hacking incidents till now, one can’t refute it totally going ahead.

• Anonymity could be a threat – Complete anonymity offered by crypto-currencies can be an issue in case of threat or fraud detection.

RBI and Government step in

The Government recently announced that it could ban private crypto-currencies in India. It plans to introduce an Indian cryptocurrency and Regulation of Official Digital Currency Bill to ban private crypto-currencies in India. RBI announced that it would bring in a new official digital currency for India. While RBI will think of a name for the currency when one is introduced, such type of currency is called central bank digital currency (CBDC).

While the nature of such a currency is not yet known, CBDC will be backed by the Government and RBI. Lawmakers could think of bringing a large part of the current Indian Rupee into the digital domain. This will be a push further towards a cash-free economy. Currently, we have moved in this direction somewhat through digital payment systems – UPI, credit and debit cards and QR codes. However, even these transactions finally relate to fiat currency. CBDC will take it a step further whereby even the underlying will not be INR currency.

A technology totally new to India? Not really!

According to RBI’s February, 2020 paper titled “Distributed Ledger Technology, Blockchain and Central Banks”, block-chain, the technology behind most digital currencies is not entirely new to India. The paper gave several examples of block-chain technology usage in India

• State governments like Andhra Pradesh and Telangana have started blockchain-related solutions in the areas of land registry, digital certificates, electronic health records, etc.

• Yes Bank issued commercial papers using blockchain technology in July, 2019

• Axis Bank launched its international payment service using Ripple’s enterprise blockchain technology in November, 2017

• HSBC India and Reliance Industries Ltd. executed blockchain-based trade finance transaction in November, 2018

Is RBI the only central bank looking at CBDC?

RBI is not the only Central Bank looking at introducing a digital currency. China has been working on a CBDC since 2014 and has termed it as DCEP (Digital Currency Electronic Payment). Many such other projects or studies have been going on across the world

Final Thoughts

It is hard to say when RBI will come out with its own digital currency, how the whole system will be implemented and how India, with its huge digital divide, will adopt the technology. However, a Central bank based digital currency does have some advantages such as:

• Being regulated by a Government authority

• Reducing physical contact, critical in a post-COVID world

• Decline in use of cash

• Reduction in fraudulent transactions and fake currency used for “not-so-good” activities

• Increase financial inclusion in a country like India where internet penetration is higher than banking penetration.

RBI has been agile enough to read the writing on the wall – digital is the future. It also paves the way for Modi Government’s favorite tag-line, “Minimum Government, Maximum Governance”. Watch this space for more updates on RBI’s Indian crypto-currency initiative.

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