India’s March towards Digital Currency

The first day of Feb always carries huge expectations in India with most eyes drooping with expectations on what the Government has to offer to them and many others drooping with curiosity. The day marks the announcement of the Annual Financial Statement,?prominently known as?Budget under Article 112 of the Indian constitution. Honorable Minister of Finance Nirmala Sitharaman announced India’s march into the Digital Currency world under regulatory oversight. This should serve?Indian masses gratifyingly post the government’s blanket ban on private crypto currencies.

?The Finance Minister announced the launch of RBI backed Digital Rupee also called as Central Bank Digital Currencies (CBDC). The digital rupee will be backed by blockchain and other novel technologies.?

So what are CBDCs? How different are they vis-à-vis conventional crypto currencies? Let’s decipher the content one by one.

?CBDCs are legal tender created by central bank of a nation in digital form. They are synonymous to physical currencies but exist in digital form. They are currently being considered by 81 nations representing 90% of global GDP. CBDCs have been holistically launched by 5 nations namely Bahamas, Antigua, St. Lucia and 2 other carribbean nations. The Central Bank of Nigeria has launched eNaira, its own version of CBDC. Among the, the Bahamian Sand dollar by Central Bank of the Bahamas remains overtly popular.?

?While observers speak greatly of the potential of CBDCs, they are unlike conventional crypto currencies. The basic difference between them are;

• Cryptos aren’t backed by any reserves exposing it to volatility of the market, while CBDCs are backed by central reserves
• Cryptos don’t possess any inherent value. They are erroneous, volatile and pose huge risk to the investors. On the other hand, CBDCs possess same value as physical currency, in this case Indian rupee, and will be graciously backed by Central Bank, in this case, The Reserve Bank of India

With all this said, let’s understand the flip side of this coin;

• The most acute of them is privacy issues. With the data in the hands of Central Authorities, privacy is a?far-fetched dream. In democracies, there are ‘N’ number of bodies to safeguard the same.?But what about Totalitarian states? It’s a debate that will rage forever
• The Central banks will have complete control over the dictation of CBDCs. In case of steep fall (like the cryptos are experiencing now) the central banks will come to the rescue with its reserves, but will it allow the rapid rise too? Even if it allows, how about the taxation rates on it??
• The widespread adoption of the same is difficult considering the digital divide that exists in the third world economies
• How about Financial literacy? This is another caveat that will haunt the conventional minds. Close to 60% still believe that conventional investments in real estate and stocks and transacting via physical banks is safe and shy away from using digital platforms to do the same
• Liquidity factor will be another back breaker for the government. If the masses decides to excessive amount of money from banks at once and purchase CBDCs, it will pose a mountain of challenge to give away liquid cash

With all this said and done, the silver lining for the Crypto aspirants in India is that some form of Crypto is in vogue and the Government of India are enthusiastic about it too. Very recently, The Central bank of UAE and the Saudi Central Bank have struck an agreement on CBDCs cooperation. The potential such agreements has to offer is immense in terms of economic and political cooperation. In the coming years, we hope to see such pro-active agreements from the sub continental nation with other stakeholders. As far as the budget is concerned, taxing virtual digital assets at 30% can prove to be heavier for the common man. Reasonably negotiating and reconsidering it by bringing down to single digit can encourage the masses to possess digital assets instead of conventional ball of game. At a time when people are flocking towards buying virtual real estate offered by Metaverse Group, reducing the said tax rate can help the commoners believe that such things exist and will help them not to remain oblivion to these.