Virtual currencies have always been tightly restricted, if not outright prohibited, in India. The Reserve Bank of India (“RBI”) has consistently opposed the use of “private virtual currencies” due to their uncontrollability. Illicit black-market transactions and shadow economies are feasible because the RBI has no control over who or how much cryptocurrency is transported where. However, the benefits of cryptocurrency outnumber the traditional currency, the RBI also intends to maximize these benefits, particularly in the current economic situation, where digital payments are growing more common.

The advent of digital currency provides the economy with all of the benefits of cryptocurrencies while keeping the security of regulated, legal coinage. The RBI wants the introduction of the digital rupee to cause as little disruption as possible. It is not meant to be a replacement for physical currency, but rather to enhance it. Digital cash is expected to diminish demand for conventional currency. Physical cash would be manufactured, held, and transferred more inexpensively as the economy as a whole shifted towards digital payments and currencies. To further understand the Indian perspective, let’s look into the Central Bank Digital Currency (“CBDC”) Concept Note (“Concept Note”) issued by the RBI.

The Central Bank Digital Currency Concept Note

CBDC i.e., Digital Rupee is defined by the RBI as legal money issued by a central bank in digital form, comparable to sovereign paper currency. To be recognized as a medium of exchange, legal tender, and secure store of value, it must take a different form than existing currency and be exchangeable at par with it.

The Concept Note splits CBDCs into two categories based on their usage within the payment ecosystem: “Retail CBDCs” and “Wholesale CBDCs.” Retail CBDC is an electronic cash created primarily for retail transactions and intended for use by the private sector, non-financial institutions, consumers, and businesses. Wholesale CBDC is limited to specific financial institutions and is used to settle interbank transfers and other wholesale transactions.

The Concept Note further categorizes CBDC models as direct and indirect based on the issue and management of CBDCs. The central bank handles all aspects of the CBDC system, including issuance, account maintenance, and transaction verification, under a direct approach. The central bank will issue CBDC to consumers indirectly through intermediaries in this structure, and any consumer claims will be processed by intermediaries, as the central bank only handles wholesale payments to intermediaries.

Commercial banks and regulated non-bank financial service companies may act as intermediates. The indirect model is similar to the current physical currency management system, in which banks manage activities such as public distribution of currency notes, account-keeping, compliance with know-your-customer and anti-money laundering and counter-terrorism financing requirements, checks, transaction verification, etc. It is important to look into the following:

• Impact on citizens
• Implications upon Cryptocurrency

Impact on citizens of India

The impact on the ordinary consumer is likely to be low because the RBI wants the launch of the digital rupee to be as smooth as possible in the current financial environment. Individual consumers benefit most from the ability to use different payment methods for the goods and services they purchase. The Digital Rupee is expected to be another cog in the payments system, similar to UPI, NEFT, or internet banking. The Digital Rupee shall most likely be delivered using digital wallets. Because the project is still in its early phases, it is unclear how people will be able to request that a portion of their wage is paid in digital rupees or that real money be turned into digital money.

Implications upon Cryptocurrency

Digital Rupee and cryptocurrencies are virtual currencies that exist in internet infrastructure and are based on blockchain technology. In general, because of their similarities, questions are raised concerning their basic differences. Initially, cryptocurrencies were developed to free individuals and their monetary transactions from government control, whereas CBDCs are government-backed and government-controlled currencies that were introduced to lower the time and costs involved with transaction settlement.

Digital Rupee cannot be compared to cryptocurrencies because of the fundamental differences between the two stemming from their nature and origin. As a result, it is critical to note the following:

• The digital rupee would be issued and controlled by an RBI, whereas cryptocurrencies are not regulated by a central authority.
• The digital rupee would use a permitted private blockchain network, whereas cryptocurrencies use an open network with no permission.
• Digital rupee users’ identification would not be anonymous because it is linked to an existing bank account, although cryptocurrency users’ transactions are anonymous.
• The digital rupee would be utilized as a medium of trade rather than an asset, whereas cryptocurrencies are often used as assets rather than mediums of exchange.

As a result, the economy reaps all of the benefits of cryptocurrencies while still maintaining the security of legal and regulated tender.

Looking Forward

Given that the deployment of CBDCs shall eventually result in unprecedented levels of state surveillance of users’ bank accounts, the RBI would need to strike a balance between identity verification to avoid criminal activity and ensure user privacy. Furthermore, the concentration of financial information in a single area makes it vulnerable to data breaches and leaks. As a result, the RBI would be forced to adopt procedural safeguards and regulations to ensure the safety of its users.

It is critical to emphasize that CBDCs be integrated into India’s financial infrastructure, such as UPI and digital wallets. Interoperability between various payment methods would be crucial. The Note further emphasizes that the system will be safer than the current payment infrastructure because CBDCs will use encryption. Interoperability between networks will also be critical for cross-border CBDC transactions, as the RBI will have to deal with several networks for each significant currency transaction. The RBI believes that this can be accomplished by working with stakeholders to build global standards to facilitate international transactions.

Given the global spread of the digital rupee and its potential consequences, like transparency and low operational costs, among others, the RBI has launched the CBDC pilot project, demonstrating its readiness to make CBDCs a reality in India. The start of the pilot project is critical for identifying operational, technological, policy, and regulatory challenges that may need to be addressed before the full-fledged operation of the digital rupee in India is established.

authored by: Abhishek Bagga, (Senior Associate Dispute Resolution)