With the central bank poised to begin the process of adopting an official digital currency, veteran finance adviser Shivanand Pandit assesses the checks and balances needed to safeguard the process

The lawfulness of cryptocurrencies in India remains murky, but the Reserve Bank of India (RBI) is working on a “phased implementation strategy” for a Central Bank Digital Currency (CBDC). Four years after an inter-ministerial committee’s recommendation to launch fiat money in the digital format, the RBI has signalled that preliminary plans to discover its feasibility are likely to be launched soon.

The deputy governor of the central bank, Rabi Sankar, has mentioned that the RBI is working towards a phased execution plan for its own digital currency, and is in the process of introducing it in the wholesale and retail sectors shortly. He said that central banks have enhanced their care on digital currencies, and their launch will be supported by the sovereign, which will assist in reducing the use of cash in the economy and reduce risks to the public from the use of private currencies.

Sankar also said the RBI is scrutinising uses with little or no disruption to India’s banking and fiscal systems. He has cited that legal modifications would be essential, as contemporary provisions had been made with regard to currency in a physical shape under the Reserve Bank of India Act. He said significant amendments would also be needed within the Coinage Act, the Foreign Exchange Management Act (FEMA), and the Information Technology Act.

Sankar said that cryptocurrencies such as Bitcoin certainly did not match the RBI’s definition of “currency”. This was the main reason that the RBI, together with other central banks all over the world, are considering CBDCs as a substitute to the volatile crypto asset in the conventional economy, as the CBDC curtails damages and is not subject to the volatility of market instabilities.

Identifying risks

In 2017, a high-level inter-ministerial committee was established by the Ministry of Finance to examine virtual currency matters and recommend a plan of action. The committee’s 2019 report focused on numerous risks linked with private parties and decentralised virtual currencies, comprising value fluctuation risks, absences of regulation, technology-related risks – namely phishing and Ponzi schemes – illegal and criminal uses such as terror funding and money laundering, and the stress on a nation’s energy resources due to scarcity and processing demands.

The committee report suggested rolling out a CBDC, as well as the criminalisation of incidents surrounding cryptocurrencies. The creation of a statute prohibiting proposed cryptocurrencies is also in this committee report.

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Shivanand Pandit is an independent finance and tax adviser with 25 years of experience in the fields of finance, accounting, taxation laws, wealth management, audit, corporate and banking laws. He can be reached at: panditgoa@gmail.com