Govt May Introduce Digital Rupee, But Is India Ready for It?

The regulation of digital currency bill proposed by the government raises an interesting conundrum.

The banning of cryptocurrency and regulation of digital currency bill proposed by the government raises an interesting conundrum.

(Photo Courtesy: IANS)

The banning of cryptocurrency and regulation of digital currency bill proposed by the government raises an interesting conundrum.

On one hand it proposes to introduce a digital currency, on the other hand, it aims to ban cryptocurrencies, seemingly treating both, as if they are two sides of the same coin.

Though the government has later said it is reconsidering the ban on cryptocurrencies, cryptocurrencies should not be understood interchangeably with digital currencies as meaning the same thing.

Unlike traditional currencies, crypto assets are not issued or backed by any government or central bank.

What is Cryptocurrency?

A cryptocurrency, broadly defined, is virtual unit of account which takes the form of digital tokens or coins.

The 'crypto' in cryptocurrencies refers to a unique string of characters that can be traded electronically via a cryptography system that is verified by independent computer networks or nodes.

Every transaction is recorded in a distributed ledger called a blockchain which functions as a universal public ledger. Because each and every transfer, for instance, of a 'Bitcoin' or an 'Ether' is recorded in the blockchain, any attempt to spend the same crypto after it has already been transferred will be detected by the network.

Cryptos are intangible, exist digitally, and have no intrinsic value. They are movable goods, which you pay real cash to purchase. Their value is determined by the market.

Some would say that they are an alternative asset class. They do not represent underlying value like fiat currency, such as digital rupees – which is essentially cash in a digital form.

What Is Digital Rupee?

The government’s decision to introduce digital rupee is a well-timed recognition of the widespread trend towards cashless payments.

Many countries are exploring the benefits and drawbacks of introducing a central bank-backed digital currency (CBDC) or at an advanced stage of implementation as in the case of China or have introduced a digital currency – the Bahamas – where it is known as the sand dollar.

Considering declining cash use and a lack of universal access to the banking system, it is easy to understand the motivation to introduce a digital currency. It would improve financial inclusivity as well as payment efficiency.

The proposed digital rupee would be a form of currency issued digitally by the Reserve Bank and approved by the central government to be legal tender. It will represent a liability of the central bank.

CBDCs are intended to be the digital equivalent of cash for use by end users such as households and businesses and offer a new option to the general public for holding money.

However, they are different from cash, as they come in a digital form unlike physical coins and banknotes.

They are also different from existing forms of cashless payment instruments such as card payments and e-money, as they represent a direct claim on the central bank, rather than the liability of a private financial institution.

What About The Infrastructure?

The proposed law is a good starting point. But great ideas are everywhere. It is all about execution. Much thought and effort would have to go into providing an infrastructure backbone including internet connectivity, points for acceptance by merchants (they would have to accept it as it is legal tender) and for use to be widespread, the digital rupee should be transferable without the internet like cash.

There are many parts of the country which either due to sheer size or geography or inadequate infrastructure, lack adequate internet penetration.

China which faces similar hurdles, has anticipated this by providing users the ability to transact in digital yuan without the internet.

What Are The Privacy Implications?

Transacting in digital rupees would mean registering a digital presence – whether to download on a mobile phone or any other device to transact via the internet or any point-to-point terminal.

A trace of every transaction will remain in the system and you cannot stand outside the system and transfer digital currencies. Your spending history, likes, preferences, or that gift you purchased your wife could potentially be open for scrutiny by the government, and that too, possibly, in real time.

The anonymity of cash will not be there. While it would be useful as a potential tool to track tax evasion, money laundering, terrorist financing or corruption, it could potentially end up becoming the ultimate surveillance tool in the hand of the government.

The Supreme Court in a landmark judgment declared privacy to be a fundamental right. But also stated that it is not an absolute right. A case could always be made on the grounds of prevention of crime or national security to monitor financial transactions.

The only question that would remain is whether you are a person of interest to the government. In the draft Data Protection Bill – financial data has been considered as sensitive personal data and safeguards have been contemplated.

Provisions have been proposed to anonymise data – an important requirement recognised by the Supreme Court.

Considering our very real craving for privacy, as seen from the continuing saga of WhatsApp’s changes to its privacy policies, and the shift to other messaging services, robust safeguards and firewalls in the infrastructure as well as legal protections have to be provided.

While some degree of information has to be shared – users already provide basic information for mobile, credit card and banking services – rigid legal safeguards will have to be designed to protect privacy as well as the anonymity of data in the system for it to work successfully.

(The author is a Delhi-based lawyer. He can be reached at [e-mail] is an opinion piece, and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)