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Finance Ministry plans to create legal framework for CBDCs based on RBI’s proposal

In Parliament, the government revealed its position on Bitcoin as legal tender and made its case for a CBDC.

“…Government has received a proposal from the Reserve Bank of India (RBI) in October, 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form,” the Ministry of Finance wrote in response to a question by Indian National Congress MP Adoor Prakash in the winter session of Lok Sabha.

The RBI has been examining use cases and working out an implementation strategy for the introduction of central bank digital currency (CBDC) without any disruptions, the ministry added.

When asked about the purpose of the scheme, the ministry wrote that the CBDC will:

  • Reduce dependency on cash.
  • Result in higher seigniorage due to lower transaction costs.
  • Limit settlement risk.
  • Provide trusted and regulated legal tender-based payments option.

“There are also associated risks which need to be carefully evaluated against the potential benefits,” the response read.

The ministry’s answer in parliament is an indication that the Indian government is serious about its plans to introduce CBDC and that the plan is progressing at a steady pace. It remains to be seen what timeline the government is targeting for a mainstream rollout.

Is the government planning to recognise crypto as legal tender?

With CBDCs, the government planned to offer Indians an alternative to private virtual currencies, and avoid their “damaging consequences”.

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The finance ministry reiterated its stance against recognising Bitcoin as legal tender in India in response to another question by MP Sumalatha Ambareesh and Congress MP DK Suresh.

The finance minister also revealed that the government has not been collecting any data on Bitcoin transactions in the country.

Is India any closer to regulating cryptocurrencies? 

The government has listed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, for introduction during the winter session of the Parliament which commenced on November 29. On the Lok Sabha agenda, the purpose of the bill remains unchanged from when it was earlier listed in February this year:

To create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses. (emphasis ours)

The unchanged description has caused many crypto investors in India to panic, and prices of all major cryptocurrencies plummeted after the agenda was circulated last week. Developments over the past few months, however, strongly indicate that the crypto bill will not seek to ban major cryptocurrencies.

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