Introducing India’s own cryptocurrency

Government to ban cryptocurrencies; to create official digital currency framework under RBI in the Budget session

The government will table a ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ during the Budget session. It is slated for introduction, consideration, and passing in the Lok Sabha.

The Indian Parliament, in the current Budget session, will consider a bill that prohibits all private cryptocurrencies. The bill is expected to create an official digital currency to be issued by the Reserve Bank of India, according to a bulletin of the Lok Sabha for the Budget session.

The schedule for the session also reveals that ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ is slated for introduction, consideration, and passing during the session.

In India, cryptocurrency startups, including CoinSwitch Kuber, WazirX, CoinDCX, BuyUCoing, Giotuss, and others have been operating in a grey area after the RBI banned the trading of cryptocurrencies, including Bitcoin, in India.

Earlier, in March 2020, the Supreme Court lifted the ban on cryptocurrency, rejecting the earlier order. In a landmark judgment, a three-judge bench, consisting of Justices Rohinton Nariman, Aniruddha Bose, and V Ramasubramanian, said the RBI order was “unconstitutional.” The apex court judgment had come after two years of the ban, which was put in place in April 2018.

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Why in news?

The government is considering the possibility of introducing India’s own cryptocurrency, code-named “Lakshmi”.

What is the need?

• Crypto-currency is a digital currency that allows transacting parties to remain anonymous while confirming the transaction is valid.
• The provision of anonymity is widely misused especially in making cross-border transactions.
• They are widely used as a means for money-laundering, terror funding and drug trafficking, and other illegal activities.
• The increasing share and presence of bitcoins due to speculative trading for return on investments is getting to be a cause of concern.

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How can legalising help address this?

• India’s attempt to legalise and introduce its own cryptocurrency would give it the status of a fiat currency.
• This formal government authorization could prove to be an alternative to popular non-fiat cryptocurrencies such as bitcoin and ethereum.
• “Lakshmi” would adopt a variation of the blockchain technology employed by bitcoin.
• The technology would help verify every trade and rule out the possibility of dual transactions employing the same coin.
• Also, the new currency would be subject to the same capital account controls as the rupee, in terms of cross-border transactions.
• The money supply at every instant is known and cannot be manipulated, unlike with normal fiat currencies.
• Besides, users would have to submit to the usual know-your-customer norms.

What are the challenges?

• The introduction of such a new cryptocurrency, would make it a legal tender alongside the rupee.
• This requires legislative action of making amendments to the Currency Act.
• Pegging it to rupee would  have an impact on the rupee exchange rate along with the risk of fluctuations.

What is the way forward?

• India can consider legalising and regulating the existing popular bitcoin instead of introducing a new crypto-currency.
• Ex: Japan has recognised bitcoin as a legal currency, with anti-money laundering rules and capital requirements.
• Also, India can use GST as a tool to curb the frenzy over bitcoins by taxing their supply.
• Capital requirements, levy of GST on supply of bitcoins and income tax on the profits made are certain to reduce the speculative effect.
• It is for the RBI, CBDT and GST Council to discuss and formulate and roll out a  policy to deal with bitcoins effectively.