During the Budget 2022, Finance Minister Nirmala Sitharaman stated that the introduction of Central Bank Digital Currency (CBDC) will give a big boost to the digital economy. Moreover, the digital currency will also lead to a more efficient and cheaper currency management system.
“Government is continuously encouraging digital banking, digital payments and FinTech innovation sectors to ensure that the benefits of digital banking reach every nook and corner of the country in a consumer-friendly manner.”
– FM Nirmala Sitharaman
In her annual budget speech, Nirmala Sitharaman also outlined plans for a 30% tax on income from digital assets.
ABOUT CBDC
CBDC is a legal tender issued by a central bank in a digital form. It is similar to a fiat currency issued on paper and is interchangeable with any other fiat currency. According to Investopedia, the goal is to provide users with convenience and security of digital as well as the regulated, reserve-backed circulation of the traditional banking system. Only its form is different.
It is a sovereign currency in an electronic form and it would appear as a liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form, and use of a CBDC can be molded for specific requirements. CBDCs should be exchangeable at par with cash.
If there is an overwhelming demand for CBDC, and CBDCs are issued largely through the banking system, as is likely, more liquidity may need to be injected to offset the currency leakage from the banking system.
The introduction of CBDC would require an enabling legal framework since the current legal provisions are made keeping in mind currency in paper form. Even though CBDCs will be a primarily technology-driven product, it will be desirable to keep the legislation technology-neutral to enable coverage of a variety of technology choices.
The announcement in Budget 2022 essentially expresses the government’s intention on cryptocurrencies and other virtual currencies. The RBI has on several occasions flagged concerns of money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc, and had planned to announce its own CBDC.
WHY THIS SUDDEN INTEREST?
The adoption of CBDC has been justified for the following reasons,
- Central banks, faced with dwindling usage of paper currency, seek to popularise a more acceptable electronic form of currency.
- Jurisdictions with significant physical cash usage seek to make issuance more efficient.
- Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.
ADVANTAGES
- Payments using CBDCs are final and thus reduce settlement risk in the financial system.
- CBDCs would also potentially enable more real-time and cost-effective globalisation of payment systems, without the need of an intermediary.
- India’s high currency to GDP ratio holds out another benefit of CBDCs. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.
- In addition, by providing a genuinely risk-free alternative to bank deposits, they could cause a shift away from bank deposits which in turn might reduce the need for government guarantees on deposits.
- Availability of CBDCs might reduce panic ‘runs’ since depositors have knowledge that they can withdraw quickly.
TECH RISK
CBDC ecosystems may be at similar risk for cyber-attacks as the current payment systems are exposed to. Ensuring high standards of cybersecurity and parallel efforts on financial literacy is therefore essential for any country dealing with CBDC. In developing countries, a lower level of technology adoption may limit the reach of CBDCs and add to existing inequalities in terms of accessing financial products and services.
HOW IT WORKS
Digital Rupee will be an Indian Digital Currency and will function using blockchain and other technologies to be issued by Budget 2022-23.
The magnitude and frequency of digital asset transactions “have made it imperative to provide for a specific tax regime”, where profits from transactions are taxed. The tax would also apply to gifts of digital assets, with recipients being liable to pay the levy. Taxes for all other transactions would be deducted at the source.
REVIEWS
Prime Minister Narendra Modi said the Central Bank Digital Currency or the Digital Rupee will make online payments more secure and risk-free and boost the digital economy in the years to come. Central Bank Digital Currency (CBDC) will strengthen the digital economy. If anyone makes a payment in digital currency, you will be able to change it to cash,” he said.
“It would provide a cost-efficient alternative to cash as the cost of printing, storing, transportation, and distribution of currency can be reduced considerably and hopefully bring down the dependence of cash in the economy,” said Lily Vadera, Senior Advisor, Cyril Amarchand Mangaldas.
The RBI’s digital currency will help even those who do not have a bank account as it can be digitally transferred digitally, Bhagaban Behera, CEO & Co-Founder, Defy said.
Bengaluru-based chartered accountant B E Kumar Prasad urged people to pick the RBI-backed digital rupee over unregulated crypto assets citing the lower risks generally associated with an asset regulated by a central bank.
CONCLUSION The introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated, and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits.
