Mumbai: Cryptocurrencies have been making the buzz lately, for negative reasons like heightened volatility and sharp fall in prices. While these currencies are unregulated in India, this year the government announced a flat 30% tax rate on capital gains from cryptocurrencies.
Another major announcement that the government had made in this budget was the introduction of RBI’s own currency- the digital rupee. What is this digital rupee, and why does India need a parallel currency? To understand this, we were joined by Gaurav Dahake, CEO of Bitbns on The Money Show. He helped our viewers understand the concept of this digital currency and its advantages and disadvantages better.
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What’s This Digital Currency?
This digital version of the rupee is called the Central Bank Digital currency, or the CBDC. It is a legal tender that will be issued and controlled by the central bank. since it is a fiat currency, it can be exchanged with other fiat currencies. It will have parity with the rupee, and digital tokens can be used for regular transactions. What’s interesting is that this CBDC will be backed by blockchain technology, the same technology that currently supports cryptocurrency transactions.
So how is it different from cryptos?
While both CBDC and cryptocurrencies are backed by blockchain technology, they have a bunch of differences. While crypto can be mined, the CBDC cannot. The control of cryptocurrencies lies with the issuer, while the control of the CBDC will lie with the RBI.
Also, the value of cryptocurrency is based on the issuer system, while the CBDC will have the same value as the rupee.
Types of CBDCs:
Currently, the RBI is exploring two models of CBDC- retail and wholesale. Retail CBDCs will be issued to the general public, who will be able to hold these in a wallet and use them for daily transactions. It could be especially helpful for consumers who can’t access traditional banking services. There’s also no risk of bank failure since the funds are backed by the government. The wholesale CBDCs would be used by financial institutions. Banks could use CBDC to transfer funds and settle transactions more quickly. This type of CBDC could also be very useful for cross-border payments.
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What Are The Advantages?
The CBDC comes with a set of merits. It eliminates the need to carry physical notes and coins, and risks wear-and-the tear or soiling of physical notes. The aim of the CBDC is to provide users with the convenience as well as security of a centrally-backed digital traditional banking system. The CBDC will further enhance the digitization of the Indian economy and streamline the current payment system. The CBDC will also work towards improving financial inclusion. CBDC payments will take place in real-time, instantly, and on one ledger. CBDC can eliminate the risk of the failure of a commercial bank and can keep the users’ money safe even if there is a closure of a bank.
What Are The Disadvantages?
While CBDC boasts a variety of pros, it comes with its own set of cons too. The usage of CBDC could lead to a lot of data being collected by the government or third-party agencies and could translate to lesser security for users. India has made progress with rural penetration of electricity, wi-fi, and telecom services, but there are still pockets in the interiors that do not have access to these services or smartphones. This could hinder the widespread adoption of the CBDC. There is still a fraction of the population that doesn’t trust the concept of digital payments, so it would be difficult to inculcate the adoption of the same pan-India. Lastly, since this currency would be held digitally, commercial banks could face losses and this could reflect in their stock prices as well.
So What’s Next?
The government is working on rolling out a pilot for the CBDC, while more clarifications on taxation, adoption, functioning, etc are awaited.
