How probably is a digital rupee?

Anjali Menon and Aman Agarwal 

Recent volatility apart, the valuations and recognition of cryptocurrencies like Bitcoin and Ethereum have been hitting report heights, and the array of avenues accepting these non-public cryptocurrencies as cost devices are additionally on the rise. The regulatory panorama round cryptocurrencies has transitioned from press releases issued by the Reserve Bank of India (“RBI”) cautioning customers towards dangers related to non-public cryptocurrencies, to the RBI issuing a blanket ban on RBI-regulated entities (like banks and intermediaries) offering providers to individuals/settling transactions involving cryptocurrencies, to the Supreme Court of India hanging down RBI’s ban as disproportionate, to the federal government formulating a invoice (the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 that’s but to be tabled earlier than the Parliament) to ban non-public cryptocurrencies. Despite the noise inside authorities circles to ban all non-public cryptocurrencies, cryptocurrencies presently function in India in a regulatory vacuum and transaction volumes proceed to witness a large surge.

In India, whereas formally the destiny of personal cryptocurrencies is unsure, the Crypto Bill 2021 facilitates formulating an official/central backed digital foreign money that will likely be issued by the RBI and could be recognised as ‘tender’. Several nations throughout the globe have rolled out (or are designing/testing) their central backed digital currencies (like Ecuador’s Dinero Electrónico, the Swedish eKrona, and the Chinese eYuan) and have charged forward on this house, with different intrigued nations shut at their heels.

Sovereign backed digital foreign money and challenges

Centralised vs Decentralised and Volatility

The basic ethos of personal cryptocurrencies is that they’re non-public (user-driven), decentralised (with out involving any regulator) and allow direct peer-to-peer transactions below the cloak of anonymity. The worth of personal cryptocurrencies is market-driven, and never regulated by any authority or primarily based on the worth of any foreign money/commodity or different underlying belongings. This makes them unstable in nature and there’s a common notion of those being much less safe. Regulators throughout the globe have subsequently expressed considerations vis-à-vis non-public cryptocurrencies primarily from the attitude of monetary safety, tax evasion and cash laundering.

Any central backed digital foreign money then again is a digital type of fiat foreign money (i.e., government-issued money) which will likely be authorities authorised, clear (forsaking an digital report/path) and comparatively much less unstable. Central backed digital currencies may also additional the federal government’s efforts in the direction of monetary inclusion and cashless/digital funds and will likely be interoperable between totally different banking programs making them safer and extra dependable/resilient.

Distributed Ledger Technology/Blockchain

Private cryptocurrencies depend on the distributed ledger expertise and blockchain to validate transactions. Distributed ledger expertise is sort of a communal database accessible to all customers that permits clear validation of transactions and monitoring of historic trades.

Transaction validation on the blockchain requires excessive electrical energy; which results in funds by blockchain not being simply scalable to excessive transaction volumes. Additionally, there being a central validator of all transactions (in case of central backed digital currencies), would defy the very idea of a decentralised blockchain system.


Mining non-public cryptocurrencies require vital computing energy which will increase transaction prices and casts a shadow on their long-term sustainability. While central backed digital foreign money is touted as a cost-saving measure (from an interbank settlements perspective and given foreign money notes are costly to mint and retailer), designing and implementation of a central backed digital foreign money, institution and upkeep of the infrastructure to facilitate central backed digital foreign money funds will entail vital prices in a safe trusted setting.

Monetary Policy and Financial Stability

Before central backed digital currencies are operationalised, you will need to contemplate and consider their financial, systemic, regulatory, and technological affect on the monetary system. Ease of accessibility of central backed digital currencies and their protected and safe storage in a protected and resilient system protected towards cyberattacks, system failures or disruptions, may also play a key position of their use/acceptance. In regulating central backed digital currencies, their utilization in cross border transactions (like non-public cryptocurrencies that are inherently borderless) additionally must be evaluated, particularly on account of the Indian Rupee in any other case not being a convertible foreign money.

Non-interest-bearing central backed digital currencies might primarily operate like money and function a medium of change between peer-to-peer and peer-to-business transactions. However, central backed digital currencies bearing curiosity at a fee set by the RBI might pressure business banks to offer extra incentivised charges to draw companies and monetary establishments to stay with them. Moreover, this elevated competitors is more likely to decrease profitability for business banks that are already below immense strain because of the surging non-performing belongings and unhealthy money owed and in a situation of monetary stress on the macro degree, companies and monetary establishments would possibly contemplate holding central backed digital currencies as in comparison with financial institution deposits, as a probably safer possibility.

Way Ahead

A coordinated method ought to be adopted to seek the advice of with the varied stakeholders (like banks, monetary establishments, fintech gamers, cost aggregators, e-commerce platforms and many others.) to not solely guarantee seamless integration of central backed digital currencies into the monetary system but additionally guarantee all related and sensible views have been addressed. A regulatory sandbox may also undoubtedly be useful in formulating a extra holistic method, as related regulatory pitfalls/ must-haves, macroeconomic elements and procedural points will be taken into consideration whereas designing and implementing central backed digital currencies. Various governments recognise the large potential and penetration energy of central backed digital currencies. The Indian authorities’s proposed central backed digital foreign money to be issued by the RBI is subsequently a welcome transfer that can handle the dangers related to non-public cryptocurrencies and instil belief within the public to make funds utilizing such sovereign issued digital currencies.

Authors: Anjali Menon, Partner and Aman Agarwal, Associate, Shardul Amarchand Mangaldas & Co. This article contains inputs from their colleagues, Veena Sivaramakrishnan, Partner and Sumant Prashant, Principal Associate, Shardul Amarchand Mangaldas & Co.

Disclaimer: This article is meant for common info functions solely. The views expressed on this article are these of the authors and doesn’t essentially replicate the views of the agency.


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