Recently, the Deputy Governor of the Reserve Bank of India (RBI) said in a speech that sustained efforts were under way to evaluate the application and viability of a Central Bank Digital Currency (CBDC), acknowledging that virtual currencies are part of the present as well as the future.

While discussions involving the rise and regulation of cryptocurrency in the Indian context have carried on for a few years, this is an appropriate juncture to cast an eye at the recent history and then look ahead at what the future might hold.

Cryptocurrency Bill

In 2017, a high level inter-ministerial committee was constituted to study issues related to virtual currencies and propose actions to be taken. The Committee’s report of 2019 highlights various risks associated with such private party, decentralised virtual currencies, including value fluctuation risks, lack of regulation, technology-based risks such as phishing and ponzi schemes, illegal and criminal use (such as terror funding and money laundering) due to anonymity and stress on a country’s energy resources due to storage and processing demands.

Also read: Reserve Bank working towards phased implementation of digital currencies

The Committee report recommended CBDC (digital rupee), as well as criminalisation of activities surrounding (private) cryptocurrencies. The genesis of legislation banning proposed cryptocurrencies is also in this Committee report: at present, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 awaits to be tabled in Parliament.

The government’s position has consistently been that only such digital currency in India would be recognised as is issued and regulated by the sovereign. Thus, CBDC is intended to be a form of digital currency issued by the RBI and approved by the Central government as legal tender. It is assumed that it will be safe, efficient and hold constant value (rather than fluctuating in value like private cryptocurrencies).

If this is indeed to happen in the near future, the RBI Act, 1934, would need to evolve substantially, because currency as a legal tender in India so far has been in physical form only (whether through bank notes, coins, postal orders, cheques, drafts and the like). The Act is currently not equipped to handle completely digital or virtual currency. For instance, the RBI Act has provisions like Sections 22, 24, 25 and 26 that pertain to the RBI’s authority and ability to issue bank notes and prescribe their specifications in this regard. In their present form, these provisions are ill-equipped to handle CBDC specifications, issuance or regulation. It is interesting to note that the Act has limited overlap with the Coinage Act, 2011 (through which the Central government covers coins as legal tender). It is only to the extent of its obligation to supply different forms of currency, which under Section 39 is limited to release of coins in lieu of bank notes and vice versa. This provision, too, does not have neutral language to cover CBDC.

The Issue Department

The Issue Department of the RBI (Section 23) is responsible for issuing bank notes and Section 33 of the Act has detailed provisions on what kind of assets it can hold. It remains to be seen whether the Issue Department would be revamped and empowered to issue CBDC as well as hold it as an asset; or a different department would be created. Changes in the Act would have to be created in this regard as well.

It is understandable that the RBI is yet exploring whether CBDC is to be used in wholesale, retail or both segments. But it would have to reckon with implications of CBDC on obligations of scheduled banks to maintain cash reserves with the RBI (Section 42).

Also read: Banks’ crypto blockade: Exchanges try other modes to enable trade

In both the above cases, stability of CBDC value would be important, as otherwise the said provisions could be significantly hampered. It may be worth exploring whether the provisions on the consequences of undue fluctuations should also be included in the Act.

The Act requires a careful comb-through to make it CBDC-compatible. Given how energy inefficient virtual currencies have been so far, the RBI would also have to consider practical aspects like the infrastructure required to regulate, hold and manage CBDC. Utilising private party infrastructure through tenders or sub-contracts runs its own risks in this regard. One hopes that the RBI formulates a comprehensive road map for the quantum leap that CBDC represents.

(The author is Mumbai-based corporate partner with HSA Advocates, and additionally heads the practice for the firm’s Kolkata Office. Views expressed here are personal and not to be construed as legal advice.)

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