Digital currencies and their economic value

What is a digital currency?

As the name suggests, digital currency issued by the central bank is legal tender in digital form. It is also often called Central Bank Digital Currency (CBDC). According to Reserve Bank of India (RBI) Deputy Governor T Rabi Shankar, a digital currency is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.

Only its form is different. It appears as liability or currency in circulation on a Central bank’s balance sheet. Now, with the rise of digital modes of payment, a digital currency is expected to provide a convenient option to physical cash.

Is India getting a digital currency? Who will issue it?

Yes, India is getting a digital currency sometime in the new fiscal year 2022-23. Finance Minister Nirmala Sitharaman had in the Union Budget proposed to introduce a Digital Rupee, using blockchain and other technologies, which would be issued by the RBI.

The introduction of the CBDC will give a big boost to digital economy, she had said, adding that it will also lead to a more efficient and cheaper currency management system. The RBI has been working on a retail as well as wholesale CBDC for some time now. The Finance Bill has proposed to amend Sections 2 and 22 of the RBI Act, 1934. to provide clarity that CBDC would also be regarded as banknotes.

Has any other country issued digital currency?

Yes, amidst the rise of private cryptocurrencies, a number of countries across the world are exploring launching their own digital currenies, which is seen by many as the future of currency. According to the Atlantic Council, atleast nine countries have launched their own CBDC with Nigeria launching the e-Naira.

China too has launched its digital yuan while many countries are conducting pilots. The US Fed and the European Central Bank are also researching and working on their own CBDCs. In fact, a recent survey by the Bank for International Settlements (BIS) revealed that 86 per cent of Central banks were actively examining it.

What is the difference between digital currency and crypto currency?

A digital currency is issued by the Central bank while cryptocurrencies such as Bitcoin and Ethereum are private and have no issuers as such. According to the RBI, a digital currency is not comparable to private virtual currencies, which are at odds to the historical concept of money.

“They are not commodities or claims on commodities as they have no intrinsic value,” Rabi Shankar had said. Private cryptocurrencies are also unregulated and decentralised and tend to be highly volatile. In contrast, a CBDC will be the same in value as the paper currency and will be regulated and issued by the Central bank. However, both the Digital Rupee as well as private virtual currencies are based on blockchain technology.

Are cryptos such as Bitcoins and Ethereum legal in India?

The Union Budget 2022-23 has proposed a taxation scheme for virtual digital assets including cryptocurrencies and non fungible tokens. However, the Finance Minister has clarified that taxing these assets does not automatically bring legitimacy.

A separate process of consultation is underway regarding their regulation and whether they should be banned. A Bill on this would be tabled in Parliament. Industry however, remains hopeful that with the Budget proposals on taxation, cryptos will eventually be legalised. But as of now, cryptos continue to be in the gray area in terms of regulation.

Then, what happens to people who have invested in cryptos?

For now, people can continue trading and investing in cryptos as before but they will have to pay taxes according to the new proposals. It is pertinent to note that most investors were already paying tax on their crypto investments.

Crypto exchanges say there has not been a significant change in investor behaviour since the Budget announcement but they are hopeful that the Finance Ministry would reduce the high tax rate of 30 per cent as well as the one per cent TDS. Experts believe that the high taxes are aimed at discouraging trade in cryptos.

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