The Reserve Bank of India (RBI) has said it is considering issuing its own bitcoin-like digital currency and has instructed financial institutions to cut off business ties with private entities dealing in such currencies.
A digital currency, if issued, would be in circulation in addition to the paper currency, and reduce the cost of printing currencies, it said.
“While many central banks are still engaged in the debate, an inter-departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency,” said the RBI. The report will be submitted by June 2018.
Industry experts said a central bank-issued digital currency was a great idea and would increase the security of transactions in the country.
“Cryptocurrency has a fixed address and does not hide anything, unlike cash. RBI’s cryptocurrency would cut a lot of the black economy, minimise tax evasion and induce a rise in the country’s overall revenue,” said Rohas Nagpal, chief blockchain architect, Primechain Technologies.
The RBI, however, has frowned upon private cryptocurrencies and ring-fenced regulated financial entities from those dealing in these currencies.
“Digital tokens by private currencies have been getting attention worldwide for their speculative value. While regulatory responses to this token currency are not uniform internationally, it is universally felt that they can seriously undermine the AML (Anti-Money Laundering) and FITF (Financial Inclusion Technology Fund) framework, adversely impact market integrity and capital controls. If they grow beyond a certain size, they can endanger financial stability as well,” said B P Kanungo, deputy governor, RBI.
The industry was divided as to whether banning financial institutions from transacting with private entities dealing in digital currencies was the right move. Nagpal said private cryptocurrencies like bitcoin were unidentified and very easy to use for criminal activities and to avoid taxation whereas RBI’s digital currency would have follow proper know-your-customer (KYC) requirements and thus be safer.
Payment Council of India Chairman Naveen Surya said the ring-fencing was a back handed way of crippling a system. “Regulator should implement KYC requirements, risk mitigation and general security related measures for the sector instead.”
Cryptocurrency exchanges were working on a collective response at the time this story went to print. “RBI’s move to ban regulated entities from dealing in…(digital)…currencies will safeguard the general investor community from potential losses, particularly those who end up investing without understanding the volatility, dynamics and functioning of cryptocurrencies,” said Mukul Shrivastava, Partner, Fraud Investigation & Dispute Services, EY India.
“The RBI has the intent to protect customer interest. However, the ring-fencing move will only adversely impact the organised sector and the government. Cryptocurrency volumes have dropped and are trading at low prices. This would force customers to sell at losses and make them more susceptible to taking illegal routes for trading crypto currency. This move will also harm legitimate businesses. The government has received Rs 500-1000 million in taxes alone from the segment last year," said Surya.
The RBI has repeatedly cautioned users, holders and traders of digital currencies regarding risks associated with dealing in private digital currencies. The central bank, however, acknowledges the potential benefits of the underlying blockchain technology.
RBI’s Kanungo said that it can be used to drive financial inclusion and for enhancing the efficiency of the financial system.