India plans to table its Central-Bank backed Digital Currency (CBDC) policy in the next parliamentary session.

We need to look at currency as a commodity for the service of transactions, a value that cryptocurrencies have provided to their consumers. Value comes in the form of decentralisation, control, and traceability.

Most of the current non-CBDC cryptocurrencies are being fuelled as an investment option; an asset class. Their price has become volatile and susceptible to high-profile speculators in the absence of an underlying intrinsic value.

Supreme Court shot down the government’s intent to ban non-CBDCs. The government needs to consider that it cannot monopolise money as it has been commoditised. While Fiat INR and CBDC can act as a legal tender, non-CBDC should be seen as an alternate, convenient, and futuristic currency with ease of transaction. This will encourage competition and technological advancements. Non-CBDC currency gives consumers the freedom of an alternate transaction medium.

Need for regulation

The flaws, risks, and speculative natures of non-CBDCs are not different from some assets available on equity, derivative, commodity or debt markets. Regulations are a better alternative than criminalising non-CBDCs.

This would include demanding access to the traceability of transactions from the non-CBDCs. The government can continue applying GST on the 'Good,' which is the non-CBDC currency, and the 'Service,' which is the transaction support by the exchanges. But this would come with a caveat that a similar GST would apply to the CBDCs as well. The government needs to safeguard CBDC from the volatility associated with non-CBDCs. Hence, The Digital Currency Bill, 2021 should peg CBDC to INR, providing an underlying intrinsic value to the asset. The combination of not banning non-CBDC and launching CBDC pegged to INR will provide a currency with intrinsic value and might help strengthen the value of INR. The Digital Currency Bill is unlikely to address reforms in three aspects: dated banking system, cash currency, and taxation. The separation of banking services from lending services is one of the many reforms which the RBI can explore.

The lending services should be a separate entity and people should have the option of parking their Fiat currency in Banking services which would not provide any returns but will also be free of any risks of going bust since the money would digitally sit idle in the banks and will not be used for lending.

At the same time, banks will charge the customers an annual nominal fee for banking services. The lending services entity of the bank will encourage customers with a risk-taking outlook to park their savings for returns in this entity’s accounts as an investment. Banks can use this parked money for lending services.

Our country’s poor are heavily dependent on cash. Commoditisation of cash is as critical as establishing a CBDC in the way forward. Cash’s non-traceability makes it worse than non-CBDC in supporting hawala, corruption, and illicit trade.

To boost “less-cash” behaviour, the government can levy GST for every withdrawal, making cash a commodity. There must be a singular taxation rate across these two commodities and all other indirect and direct taxes for goods, services, and personal income.

The government can utilise the Universal Basic Income (UBI) extended to the poor and reinvest most of the GST collected by this medium in incrementing the UBI, thereby buffering the impact on them in the short term. At the same time, they will start adopting digital transactions like BHIM pay, amongst others. The RBI and the government must encourage the spirit of innovation and explore the suggested measures towards making India genuinely future-ready and cashless.

The writer is Senior Principal, Accenture Strategy

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