Central Bank Digital Currency needs clarity; how different will it be from cryptocurrencies

Estonia, Belarus and Malta have one thing in common. The three countries have clear laws to cash in on the emerging trend of cryptocurrencies. Not only these small countries, but big countries such as the US and Japan are also known for their clear laws on cryptocurrencies.

Many of these countries are now moving towards taking digital currencies to the next level by launching Central Bank Digital Currencies (CBDC). Consider this: Estonia, with the most advanced e-government infrastructures, has recently announced that its central bank will initiate research into CBDC solutions. Similarly, while still in the early stage of development big countries such as China and South Korea are already piloting the technology.

Cut to India. There is so far no clarity on the guidelines of cryptocurrencies. Recently, the Cryptocurrency Regulation and Official Digital Currency Bill, 2021 got listed in the Budget session, with an aim to ban private cryptocurrencies. The final draft has, however, not been made public yet. Belying the notion, however, Finance Minister Nirmala Sitharaman announced last week that the government is open to discussions and will have calibrated approach to crypto.

Experts say CBDC is, however, still at the very early stage of the discussion and no one knows how it is going to be like.

At present several countries are exploring CBDC with their own approach. It is not clear yet whether blockchain technology, the underlying technology of bitcoin, will be their basis. But what sets CBDC apart from cryptocurrencies is that it is widely meant to be used as a new payment technology for lowering costs and increasing efficiency.

Pavan Duggal, advocate, Supreme Court of India and founder Pavan Duggal Associates said, “Currently, Section 4 of The IT Act has given a legal sanction for electronic record. Now the question is when electronic record gets converted into digital currency. Till now we only have paper currency. A legal framework for digital currency is needed. We have to wait and watch as cybersecurity parameters are not cleared. CBDC will take the application of blockchain to the next level.”

There are many other things that need to be clarified before digital currency is launched. For example, what happens if there is any misuse of digital currencies. Similarly, a redressal mechanism needs to be defined. Duggal said, “Digital currencies should be given sub regulator under RBI. Though a large number of countries such as Estonia, Belarus and Malta have dedicated laws on crypto assets and currencies there is a need for customisation. There are a lot of challenges.”

How different will CBDC from electronic transfer of paper money? R Gandhi, former deputy governor of Reserve Bank of India (RBI) said, “In a way, digital currency is already there. When you transfer through NEFT digital currency is already there. CBDC will add another element to it and can be used further effectively. Moreover, CBDC might impact the demand for private sector wallets. The idea has to be conceptualised first as it is still under discussion.”

Will CBDC be like a cryptocurrency?

It is important to understand that there are four types of cryptocurrencies. One is a cryptocurrency which can be a currency, like CBDC. The second type can be an asset like Bitcoin. The third can be a token utility like Ethereum. And the fourth can be a security like stocks.

Experts say CBDC like INR will come under the first category, which is a currency. It will benefit the large unbanked population of India pushing the agenda of digital India.

“I think it’s a great leap forward for India from a Digital India point of view if CBDC like the INR digital comes into the picture. A large number of people probably 20-30% don’t have a bank account and CBDC can be that solution where despite not having a bank account, they can join the digital economy.”

Should crypto be made legal?

Finance Minister Nirmala Sitharaman last week said that the government is going to take a calibrated position on Cryptocurrency. Several crypto exchanges operating in the country have welcomed the statement considering it is an encouraging sign.

CoinDCX, a cryptocurrency exchange’s founder & CEO, Sumit Gupta, said, “We care for the law of the land. Hence, we diligently follow KYC norms and adhere to regulatory practices. We have always reiterated the need for regulation, taxation and transparency for our sector. As an Indian fintech firm, we are also building global-level products. We believe crypto as an asset has huge potential and if properly administered can help India earn sizeable revenue.”

Experts say banning cryptocurrencies has never been a good idea, as it is a peer-to-peer transaction. Duggal said, “You cannot afford not to be futuristic in cryptocurrencies. A lot of work needs to be done by the lawmaker as it is a complicated subject. We have to wait and watch.”