This Article is written by Arpan Anand – 2nd Year of BBA LL.B.
Bharati Vidyapeeth,(Deemed to be University),New Law College Pune.
KEYWORDS
Digital money, Crypto, Blockchain, Central Bank Digital Currency (CBDC), Digital Rupee, FinTech, Reserve Bank of India (RBI), Monetary policy, Financial Inclusion, UPI, Cash free economy, Tokenization, Stable coins, Smart Contracts.
Abstract
Digital currencies, blockchain tech, and financial innovation are transforming the Indian economy which we see today in the introduction of secure, decentralized and efficient ways to transact.[1] As we see the rise of Central Bank Digital Currencies (CBDC) and also an increase in interest of cryptocurrencies India is in the midst of a financial infrastructure transformation. Also they promise faster and lower costs but also we see growth in financial inclusion and transparency.
This paper looks at the growth of digital currencies in India, reports on the Reserve Bank of India’s response, and looks at the regulatory and economic issues of digital assets’ entry into main stream finance. We look at issues like cyber risk, monetary policy issues, and regulatory uncertainty which we also put into perspective along with the opportunities which they present for fintech companies, investors and the government. In the end the paper puts forth a full picture of digital currencies’ role in the future of finance in India which is in many ways a transformation of the country’s financial structure.
INTRODUCTION
Money the base of every economy has seen great transformations from barter systems to metal coins, from paper currency to credit cards and now to digital forms. In that which which has seen this evolution Digital currencies present the next front. They are re shaping the monetary systems globally by way of blockchain, AI, and FinTech. In a country of over a billion people with strong digital infrastructure India is at the threshold of this monetary revolution.
The Indian government along with the Reserve Bank of India (RBI) is looking at the issue of introducing a sovereign digital currency which we may term the Digital Rupee. This initiative is to put forth wide ranging changes in financial inclusion, payment systems, economic policy and cybersecurity.
This article looks at what digital currencies are, how they are transforming the Indian financial structure, their pros and cons, and the future path which may see India take a lead in global digital finance.
UNDERSTANDING DIGITAL CURRENCIES
What is the world of Digital Currencies?
Digital forms of currency that do not exist in physical form make up digital currencies which you can use for online purchases, peer to peer transfer, investment and financial transactions as you would with traditional money, but they require electronic devices and internet.
Digital currencies mostly fall into three categories:
· Cryptocurrencies (e.g., Bitcoin, Ethereum): Distributed via blockchain, those currencies are outside of any authority’s control.
· Stablecoins (e.g., USDT, USDC): Digital currencies which put out to reduce price volatility by tying themselves to stable assets like the U.S. Dollar.
· Central Bank Digital Currencies (CBDCs): These issue out what we term as legal tender which now also include digital forms. The Digital Rupee which the RBI is at present testing out is an example.
Digital currencies which are held in digital wallets and which trade via encryption technologies that in turn provide security and verification of transactions without the use of third party intermediaries.
Difference between Crypto and CBDC.
Cryptocurrencies and CBDCs may be of the digital variety but they have very different structures, backings, legal statuses, and risk profiles.
Control: Cryptocurrencies trade in peer to peer networks which is what makes them decentralized. As for CBDCs they are of a centralized nature and are controlled by the central bank.
Legality: Cryptos do not serve as legal tender in India. Once a CBDC is fully functional they will be.
Value: Cryptocurrencies’ value is set by supply and demand in the market. CBDCs are fixed at a 1 to 1 ratio to the fiat currency.
This issue is at the core of why India is skeptical of unregulated cryptocurrencies but very much in support of the Digital Rupee.
HISTORICAL BACKGROUND: ELECTRONIC PAYMENTS IN INDIA.
India’s in to digital finance in the mid 2010s. We saw a series of key developments which included:.
· 2010–2015: In urban India which had also seen the adoption of net banking and debit cards.
· 2016 Demonetization: The government’s call to do away with high value currency notes saw a great growth in digital wallets like Paytm and PhonePe.[3]
· 2016–2020: The introduction of Unified Payments Interface (UPI) by NPCI made real time digital payments easy, secure, and free.[4] India saw a boom in digital payment.
· 2022: The Reserve Bank of India has launched a trial of the Central Bank Digital Currency (CBDC) in retail and wholesale segments.
India is a home to over 12 billion UPI transactions each month which in turn presents the proof of our digital money’s wide acceptance on a national scale.
Present situation of digital currencies in India:
Regulatory Structure.
India’s regulatory framework for digital currencies is in transition. Although they have not been out right banned, the crypto assets are subject to high taxes and also very much put under the microscope of the regulators.
Key measures include: Main elements are:.
Introducing a 30% tax on crypto profits and a 1% TDS on all large transactions.
Placing crypto assets under the FRA (Fighting of Financial Crime Act).
Crypto exchanges to follow FEMA rules.
Meanwhile we have full regulatory support for CBDCs. The Digital Rupee was made a legal tender with the passage of the Finance Bill 2022.
Digital Currency Pilot.
The Reserve Bank of India is at present running two pilots:.
Wholesale CBDC (e₹-W)[7]: Used in large value interbank transactions and securities settlement.
Retail CBDC (e₹-R): Used in day to day transactions between people and merchants through QR codes and wallets.
In over a million of its users and 1.3 lakh merchants’ reports the RBI has been collecting feedback for improvement of the model which is yet to be rolled out nationwide.
ADVANTAGES OF DIGITAL CURRENCIES
Access to Finance.
In India many are out of traditional banking. With a CBDC people can use their smart phone for transactions which they may not have had to open a bank account for. This puts the poor, rural, and illiterate into the financial mainstream.
For example in Bihar a farmer is able to get government subsidies into his digital wallet which he doesn’t have to go to a bank or post office for.
Efficiency and Cost Saving.
Today’s banking system is built on the use of intermediaries, clearing houses, and is plagued with delay. With CBDCs we see the ability for immediate, point to point transactions.
RBI’s reports also put out that a Digital Rupee may see in the saving of billions in cash handling which is to include ATM maintenance and print of physical currency.
Transparency and Openness.
In every case of digital currency transaction there is a record which reduces the issue of corruption, black money, and unaccounted wealth.
Smart contracts can be used in government welfare programs to see that funds reach the right people and not via middlemen.
Enhanced Monetary Policy Control.
CBDC’s provide real time insight into the money supply which in turn allows central banks to quickly react with policy tools such as interest rate changes or targeted cash transfers.
For instance, during a downturn the RBI may issue a CBDC which has time sensitive features on the stimulus payments.
CHALLENGES AND CONCERNS
Cyber risks.
Digital currencies are a target for hackers, phishers, and data thieves and we see also that which which may be very strong in crypto is the use of robust encryption and development of secure infrastructure to protect user funds and national financial stability.
India’s cybersecurity framework is better off today but still requires work to repel large scale cyber attacks.
Loss of personal data privacy.
CBDCs may put into government hands individual transaction data which in turn may see privacy issues raised.
Between what we can see to govern, and the private which we must protect there is a fine issue.
Digital Divide.
In over 1 in 3 Indian people still don’t own smartphones and don’t have internet access. As we roll out a national CBDC we must include in that strategies which address offline functionality and digital literacy.
Initiatives in the form of digital kiosks, village level awareness programs, and feature phone integration are put forth.
Regulatory void in Cryptocurrencies.
While present in the RBI’s regulatory scope, private crypto currencies function in what is largely undefined legal territory. The lack of a full scale crypto law is a issue for which we see play out in terms of investor protection, innovation, and global competitiveness.
The government should put forth a Crypto Regulation Bill which balances innovation with consumer protection.
ILLUSTRATION
Development of Money in India.
Barter systems Metal coins Paper money Bank accounts Digital wallets CBDC (Digital Rupee).
Flow of the Digital Rupee.
[ RBI (Issues e₹) ]
↓
[ Commercial Banks ]
↓
[ Wallet Providers / Apps ]
↓
[ Consumers & Merchants ]
↓
Mobile Payment Codes Near Field Communication Transactons .
Comparative Chart: Cash vs. Digital Currency.
Feature Physical Cash Digital Rupee
Anonymity High Limited
Transaction Cost Low Very Low
Speed of Transfer Slow (manual) Instant
Cross Border Extension Not practical At this time we see promise for it.
Traceability Difficult Easy and auditable.
GLOBAL COMPARISONS
Over in 130 countries which are into either research and implementation of CBDCs. For example:.
- China: The Digital Yuan11 is at the advanced stage of pilot. We see citizens paying via government apps also which has extended to offline payment using facial recognition.
- USA: The Federal Reserve is looking at the “Digital Dollar” through it’s FedNow project.[12]
- Europe: The EU is developing the Digital Euro to coexist with present payment systems.
- Nigeria: In 2021 the eNaira was introduced which also works within the banking system.
India which has put in place a robust FinTech framework through the implementation of initiatives like Aadhaar, UPI, and JAM trinity is in a position to leap ahead and develop the most inclusive CBDC system in the world.
IMPACT ON BANKING AND FINANCIAL SECTOR
- Risk of Channel Conflicts.
If as users transition to CBDC wallets for savings we see banks’ deposits fall which in turn affects their ability to lend. This may be managed by way of interest bearing CBDC accounts or by having bank led wallet models.
- Opportunities for Tech startups and growth stocks in the FinTech space.
Digital currencies will see a new age of financial innovation. FinTech companies will develop programmable wallets, AI investment tools, and blockchain based loan systems.
India’s digital finance sector may see growth to become a global leader with right regulatory support.
- International Transactions.
India reports to receive over 100 billion dollars in remittances each year. CBDCs which can greatly reduce the fees and time in cross border transactions may transform the lives of large sections of Indian families.
Gulf and Western countries’ bilateral agreements will do that.
ROLE OF GOVERNMENT AND RBI
The shift to digital currencies will see input from many institutions:.
RBI: Should have stable money and financial systems which also innovate.
Finance Ministry: Must have crypto and digital assets clarified.
SEBI and IRDAI: Should watch out for the investment and insurance issues related to digital currency.
CERT-In: Must develop robust cybersecurity structures for digital payments.
Also public private partnerships will play a key role in the development of large scale and secure digital currency applications.
FUTURE ROADMAP FOR INDIA
- Establish a regulatory sandbox.
RBI has a regulatory sandbox for testing of FinTech innovations in live but controlled settings. In the case of CBDC we see an opportunity for accelerated responsible innovation.
- Improve Digital Literacy.
Massive public outreaches via schools and panchayats as well as media are key to that which we do see trust in digital currencies grow.
India can draw from its experience with Aadhaar and UPI onboarding.
- Guarantee Interop.
Digital Rupee has to integrate with UPI, IMPS, NEFT, and wallets to prevent ecosystem fragmentation.
- Offline and Rural Features.
CBDCs should operate through SMS based or near field communication (NFC) technologies which is key to our last mile financial inclusion.
CONCLUSION
Digital currencies are to play a transformative role in India’s financial structure they will include greater access, speed, transparency and security. The Digital Rupee on wide adoption could see India reduce its use of cash, enable real time policy changes, and take a lead in the global digital economy.
However in that which transpires it must be done so with care, inclusion, and a technical focus. India’s success will in large part be determined by how well we strike the balance between innovation and regulation, privacy and transparency, access and security.
India is at a crossroads which it may now take to put in place bold and smart policies which will make it the world’s digital currency and economic powerhouse.
