The RBI may have barred its regulated entities from accepting cryptocurrencies, but it might just introduce its own and legalise it.
NEW DELHI: As cryptocurrencies come into question around the world for being too volatile, the Reserve Bank of India (RBI) is perhaps going to launch its own version of digital currency.
The central bank barred Thursday all entities regulated by it from dealing in cryptocurrencies like Bitcoin in an attempt to curb illegal dealings and protect customers. However, it revealed its plan to introduce its own.
“In response to the emergence of the private digital tokens all over the world several central banks are debating the possibility of introducing a fiat digital currency as opposed to the private digital tokens, these are issued by the central banks and they constitute the liability of the central bank and they will be in circulation in addition to the paper currency that we have,” B.P. Kanungo, deputy governor of RBI said at the first monetary policy briefing of FY 19.
Government-backed digital currency
Central banks globally have been tracking the virtual currency trend because of its dramatic valuations over the past few months. The RBI’s potential jump into the fray is guided by the motivation to regulate an asset that is currently free from any government controls.
The idea is to have a digital currency issued by central banks, which would be circulated in addition to already existing current paper currency. This would make cryptocurrency deals legal, as it would be an accepted government entity.
“All transactions after that will be legal because as of now the transactions in cryptocurrencies are not legal as they are neither backed nor issued by a sovereign,” said Devendra Kumar Pant, chief economist and senior director at India Ratings.
One benefit of having a government-backed digital token is cost reduction, as notes do not need to be printed and it cuts down the problem of counterfeit currency.
The RBI has constituted an inter-departmental committee to produce a report and explore the feasibility and desirability of issuing digital currency by the central bank.
“Cryptocurrencies, as of now, are not issued by a central bank so it is not correct to call them a currency. For a currency to be legal tender there should be someone backing, who says – I promise to pay the bearer a sum of Rs 100 or Rs 500,” said Pant.
“That is also the reason the government in its budget speech referred to it as crypto assets because these are assets as currency is always backed by a sovereign,” he added.
As the economy moves towards a more digital form, digital currencies will become a part of the monetary base of India soon.
The RBI has announced a clampdown on trading in cryptocurrencies. Entities regulated by it shall not deal with or provide services to any individual or business entities dealing with or settling virtual currencies, the RBI said.
“The RBI-regulated entities are required to stop having a business relationship with the entities dealing with virtual currencies forthwith and unwind existing relationships in a period of 3 months time,” Kanungo said.
The RBI believes that though it isn’t legal tender, digital currency could adversely impact the market integrity and capital controls as well as endanger financial stability if it grows beyond a critical size. With that aim, policymakers have decided to “ring fence” regulated entities from the risk of dealing with those associated with virtual currencies.
The banking regulator, however, maintained the technology rooted in the digital currencies, blockchain or the distributed ledger technologies, has potential benefits for financial inclusion and enhancing the efficiency of the financial system, adding that it could potentially be exploited for the benefit of the economy.
Considering that more and more Indians are using virtual currencies like Bitcoin, the RBI may be looking to capitalise on the trend.
“The thought behind it is because there is a lot of demand for it in the economy, so let’s do it,” said Pant.