Digital currency: Is India ready for it?

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Around 4.5 lakh UPI and IMPS transactions got affected on 1st April, 2021 when the payments system got overloaded due to a surge in financial transactions. While the reason was attributed to year-end annual system maintenance, many say the high failure rates should be taken as a triggering alarm for the country to overhaul its digital infrastructure. With a record surge in online payments since the outbreak of Covid-19, there is a need for the next level of innovation to expand the digital penetration in the country.

Can digital currency be the answer for speeding that process up? After all, in its twelve years of existence Bitcoin, the oldest cryptocurrency has never seen any downtime. Realising the need for the government-backed digital currency, at present several countries are exploring the concept of Central Bank and Digital Currency (CBDC). It will be a way for the central bank to digitalize banknotes and coins in circulation. What sets CBDC apart from cryptocurrencies is that it is widely meant to be used as a new payment technology for increasing efficiency and lowering costs. Moreover, unlike cryptocurrencies which are not considered legal tender, CBDC will not only be legal but also accepted as a mode of payment.

“We live in a twilight world. The differences are reducing between the real and virtual world. Who would have thought a digital work of art would be sold for 500 crores. Digital rupee and virtual asset discussion are very relevant to this new world. Digital Rupee could be designed by taking inspiration from top virtual assets and could be a launchpad for the next version of Digital India,” said Arjun Vijay- Co-founder & COO Giottus Cryptocurrency Exchange.

How will CBDC work?

China has already got a headstart when it comes to CBDC, as it has been working on the project since 2014. It is already testing the waters with the project being started in many cities including Shenzhen, Chengdu and Suzhou. In China, distribution will be conducted through two-tier system. That means their Central Bank will distribute the digital yuan to commercial banks. The commercial banks will then give digital yuan to the consumers in exchange for cash. But digital yuan is not a decentralised currency as it will be issued by People’s Bank of China (PBOC).

How will CBDC roll out in India? “There are a lot of ideas and questions around the Digital Rupee that is proposed to be launched by RBI. Whether it should be centralised or decentralised? Who should be able to access the data? How would the upcoming data privacy law coexist with the digital rupee processes. Whether identity, transaction, user balance would be accessible and who should be able to access the data and under what circumstances? The design would need a thorough study and clear policy framework before it can be finalized. There are a lot choices to be made before we arrive at the final blueprint for Digital Rupee. The good news is that technology is definitely available to execute the design decisions,” said Vijay.

Roadblocks to CBDC

Cyberlaw experts say tighter cybersecurity laws will be needed in the country before rolling out CBDC. Similarly, there is a need of grievance redressal mechanism if there is any misuse of digital currencies.

Pavan Duggal, advocate, Supreme Court of India and founder Pavan Duggal Associates earlier told Money9, “Currently, Section 4 of The IT Act has given a legal sanction for the electronic record. Now the question is when the 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.”