Following the 2008 global financial crisis, cryptocurrency assets came into play, as a probable alternative to the mainstream financial ecosystem. Bitcoin, which has since become the most popular cryptocurrency, was first mentioned in a white paper in November of 2008, about a couple of months after Lehman Brothers went under. Twelve years later, post the crisis and numerous ups and downs later, bitcoin has emerged as one of the most popular crypto assets, among 1,500 others.
Different crypto assets have different use cases. Out of thousands of crypto assets, there is one such prototype known as the central bank digital currency (CBDC) whose value is pegged to a country’s native currency. A CBDC is mostly centralized and issued and regulated by a country’s relevant monetary authority.
So far, there has been no country in the world, aside from the Bahamas with its “Sand Dollar,” that has officially launched a central bank-backed digital currency. However, there have been many central banks that have launched pilot programs and research projects aimed at determining a CBDC’s viability and usability — the most notable one being the Digital Currency, Electronic Payment (DCEP) project of the People’s Bank of China, which is currently testing prototypes of the future digital yuan.
Bank of England (BOE) became the first major central bank to kickstart a CBDC proposal based on blockchain-related technologies. Following that, the central banks of other nations, like Bank of Canada, China’s People’s Bank of China, and central banks in countries such as Uruguay, Thailand, Venezuela, Sweden, and Singapore, among others, have tried to follow the trend.
See related article: Will India be left behind in the digital currency race?
In the recent past, the International Monetary Fund (IMF) has listed down some salient features of countries having their own CBDCs. The advantages were two-fold: Firstly, there is potential for a more efficient payment system where the cost of managing cash is high and secondly, there’s the opportunity to enhance financial inclusion because there’s no requirement for consumers to have a bank account. Additionally, CBDC has the ability to enhance the transmission of monetary policy.
However, every technology comes with its own share of pitfalls. The biggest pitfall that has been identified with adopting CBDC is that they can be prone to cyber attacks, different kinds of error and glitches, which may affect the efficiency of the central bank.
In India, CBDC is an option that has long been considered by the regulatory bodies. Back when its central bank, Reserve Bank of India (RBI), had imposed a de-facto banking ban on cryptocurrency, RBI had floated the idea of introducing a government-backed digital currency. However, we are yet to see any development on this front.
The road ahead — and what another ban would mean for India
Recently, the Indian government has been contemplating the idea of banning all (private or otherwise) cryptocurrency assets and once again, the feasibility of introducing a digital rupee.
But over the weekend Finance Minister Nirmala Sitharaman also indicated a softened stance, when she said that the government would consider a “calibrated position” on crypto — which is an encouraging sign for the industry.
See related article: CoinDCX’s Sumit Gupta on CBDCs, regulation and India’s potential for crypto in 2021
Crypto as an asset has huge potential, and if properly administered can help India earn sizable revenue. Also, having open-source crypto to operate will only help the government develop a robust CBDC. While the digital rupee may be feasible, an outright ban on private cryptocurrency would be a deterrent to innovation for the coming years.
On a macro level, the global cryptocurrency market is now valued at US $1.6 trillion.
In India, there are nearly 75 lakh — or 7.5 million Indians who have invested in crypto assets, and there are now more than 340 companies offering bitcoin and other digital currency products and services. Many of these crypto companies are startups that have come into existence following the Supreme Court judgement that overturned the RBI’s banking ban in March 2020. A local news portal reported that the average trading volume had grown by 500% since the Supreme Court judgement. Additionally, according to Venture Intelligence, investments worth $24 million have flowed into crypto firms in 2020 after the Supreme Court lifted the banking ban.
If the government was to go ahead and draft a bill banning the trading of crypto assets, it would be a huge loss for the emerging technology. This sector employs people with specific skill sets, lawyers, accountants, software developers, among others who would be rendered unemployed in the blink of an eye. There are several noteworthy venture capital investors, who are extremely interested in accentuating the cryptocurrency industry in India, who would be forced to look elsewhere.
Imposing a ban without holding dialogue with the crypto stakeholders and players would be extremely shortsighted and would hold back India from actively participating in the global crypto space. India has all the resources to be a leading global player and this potential ban could set the country back by at least a decade.
As one of India’s key players in this industry, our request to the government would be to regulate crypto assets as a store of value and not as another currency. We would love to initiate dialogues with the concerned stakeholders in the government and help the country take ownership of its rightful place on the global crypto stage.