The Reserve Bank of India has constituted an inter-departmental panel to study the desirability and feasibility of launching a central bank backed, Rupee-based Digital or Virtual Currency (VC), it said in its annual report for 2017-2018. The RBI cited increasing costs of managing paper/metallic money as a reason for looking to introduce a digital currency. To put things into context, the total cost of printing paper notes in India stood at Rs 636 crore in 2017-18 (fiscal year), according to a report by India Today. It also cited rapid changes in the payments industry, along with the emergence of private digital tokens like Bitcoin, as factors for considering to launch a central bank backed digital currency.
This announcement is a follow up to the central bank’s notification in April, when it said that it not only created such a panel, but also claimed to have its report ready by the end of June 2018. However, neither did it provide an update on the panel in the annual report, nor did it respond to an email on the matter.
This is not the first instance of a ‘legal’ virtual currency doing the rounds though. According to a report by Business Standard, the central government was considering to launch its own cryptocurrency called ‘Laxmi’. RBI’s Executive Director Sudarshan Sen also said that the central bank was closely looking at ‘fiat cryptocurrencies’ as an alternative to the Indian Rupee.
To reiterate, fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. It’s value is purely derived from the supply/demand chain. A digital variant of such a currency would be defined as a fiat cryptocurrency.
Remains critical of cryptocurrencies
The central bank, however, remained critical of cryptocurrencies, raising multiple fresh concerns. RBI said that while these cryptocurrencies don’t pose any immediate systemic risks, it feared that the sustained popularity and usage of these currencies could lead to ‘price bubbles.’ It cited the $200 billion fall in Bitcoin’s market capitalisation to back its claims.
The central bank also said that the cryptocurrency eco-system may affect the existing payment and settlement systems, which could, in turn, ‘influence the transmission of monetary policy.’ That apart, it also cited reports by the ‘Bank for International Settlements’ (BIS), and F’inancial Action Task Force on Money Laundering’ (FATF) to warn of multiple risks associated with cryptocurrencies including, tax avoidance, money laundering and terrorist financing. The report said that digital assets such as bitcoins are stored in “electronic wallets”, thereby making them prone to hacking and operational risks.
This central bank, for a change, appears to have learned from the criticism it received, for directing all banks and financial entities in the country to stop dealing with virtual currencies, without any research or consultation.
Although, it did not technically ban cryptocurrencies entirely, the move severely restricted consumers ability to either purchase or sell cryptocurrencies like Bitcoins. At the time, the central bank justified its actions by saying that cryptocurrencies “raise concerns of consumer protection, market integrity and money laundering, among others.”
The move resulted in multiple crypto-related businesses in the country challenging the RBI’s decision in the Delhi and Kolkata High courts. Separately, the Internet and Mobile Association of India (IAMAI) had filed a writ petition in the Supreme Court to put a stay on the central bank’s order. It was the fifth such petition to be filed in the supreme court against the RBI on its order. Following that, the Supreme Court had ruled that it will club all these cryptocurrency-related cases together and hear them in July. During that judgement, the apex court upheld RBI’s ban, much to the disappointment of cryptocurrency exchanges and investors alike.
Blockchain to offer significant economic benefits: RBI
Contrary to its stance on cryptocurrencies, the central bank seemed to be in favor of implementing distributed ledger technologies (DLT) such as the blockchain in payment system, clearing, and settlement processes. “Unlike the concerns on privately issued cryptocurrency, the adoption of DLT in the domain of payment, clearing and settlement solutions holds the promise of significant economic benefits in future,” the report read. A blockchain, the underlying technology in bitcoins and other cryptocurrencies, is a shared digital ledger which is continuously updated with all transactions. This ledger keeps a record of each transaction that occurs across a fully distributed or peer-to-peer network, either public or private.
The position taken by the RBI is also in sync with that of the government, which on multiple occasions has said that it will explore using blockchain technology for various purposes. It was reported last year that the Institute for Development and Research in Banking Technology (IDRBT), a research wing of the central bank, is developing a model platform for blockchain technology. More recently though, RBI has even reportedly set up a dedicated unit to better understand emerging technologies like cryptocurrency, blockchain and artificial intelligence.