INTRODUCTION
The rapid growth of the FinTech industry in India in such a short span of time has shown a massive shift towards digitalization, which has intrigued the government and our regulatory bodies towards the development of the cryptocurrency market in India. Since cryptocurrency and blockchain technology holds the key to the massive growth of the FinTech industry in the tech-drive future
However, since private cryptocurrencies are completely decentralized, they are not backed by any asset, they do not represent any debt or liabilities, and do not have the status of legal tender, they pose a great threat to the economic ecosystem of our country.
Therefore, Finance Minister Nirmala Sitharaman carefully considering the huge growth potential and drawbacks of cryptocurrency, in the Union Budget 2022-2023 proposed that the Reserve Bank of India (“RBI”) will be introducing its own Digital Rupee named Central Bank Digital Currency (“CBDC”), which will help to provide a significant boost to the digital economy of the country.
In this article, we attempt to discuss what Digital Rupee is, how it works, how it is different from existing platforms, the regulation and how it is better from the existing digital modes.
WHAT IS DIGITAL RUPEE
Digital Rupee is a legal tender that will be issued by the RBI under its monetary framework in digital form, it will work similarly to the role of current fiat currency in way of acting as a medium for exchange, unit of account, store of value, and standard of deferred payment.
The user of Digital Rupee will be able to exchange it at par for cash, which will make it convenient and secure for its user to carry transactions, as a result, the introduction of Digital Rupee in India will provide benefits of both worlds together.
HOW WILL IT WORK
The Government and regulatory agencies have been looking at the viability and operationality of digital rupees in the country’s economic ecosystem. Since, the use of private cryptocurrency poses a huge threat as it can be used for money laundering, terror financing, tax evasion, etc., Therefore, the introduction of the Digital Rupee by RBI will allow for more stable and secured transactions.
The RBI will supply and distribute Digital Rupee in the ecosystem and a distributed digital ledger (“DLT”) will be used to keep track of such Digital Rupee transactions.
For the most part, Digital Rupee will work the same as paper money, such as although it has a different physical appearance. Since the RBI balance sheet would show it as a liability (currency in circulation) if it had sovereign money in an electronic form.
The use of Digital Currency will help bridge the global financial gap, as its users will be able to make seamless cross border transactions in a real-time and secured manner without the help of an intermediary as if the transaction is made in cash itself, which will help boost the economy of our country.
HOW IS IT BETTER FROM THE EXISTING ELECTRONIC MEDIUMS
- In the case of Mobile Wallet
Money saved in prepaid wallets or bank deposits can be transferred electronically via credit or debit cards or mobile payment applications, but Digital Rupee is distinct from these existing forms of private money. Since cryptocurrency is not regulated by RBI and therefore it’s not their liability.
- In the case of Cryptocurrency
The major difference between private cryptocurrency and Digital Rupee issued by RBI is that cryptocurrency is completely decentralized and as a result, there is high fluctuation in its value as it is derived based on the market anticipation. Whereas, the Digital Rupee is completely centralized and regulated by RBI and therefore is completely stable and secure
- In the case of UPI
The transactions made via UPI have a 1.2% settlement failure rate. Since, all of the major payment systems UPI, IMPS, etc., rely on cash to move funds. Therefore, the introduction of Digital Rupee will bring a significant improvement in digital payments as the transaction of Digital Rupee made via UPI will have less failure rate of settlement.
REGULATORY FRAMEWORK
As discussed in previous blogs, the digital payment mechanism provides a lot of ease and convenience to its consumers/users. However, it should always be kept in mind that they are prone to higher security risks as well. Therefore, a sound and robust legal requirement is a necessary requirement for an efficient payment system in India.
In India, the responsibility of managing the payment systems is entrusted to the RBI, and the RBI keeping in mind the importance of a robust and appropriate regulation for the development of not only financial system but also payment system introduced several regulations such as The Coinage Act, 2011, FEMA Act, 1999, the Information Technology Act, 2000 and the Payment and Settlement System Act, 2007, which governs the following payment modes in India –
- Cash;
- Banking Cards;
- Unstructured Supplementary Service Data (USSD);
- AEPS (Aadhaar enabled payment system);
- UPI (Unified Payment Interface);
- Mobile Wallets;
- Point of Sale Terminals (PoS);
- Mobile Banking;
- Internet Banking;
- National Electronic Funds Transfer;
- Immediate Payment Service;
However, since the concept of Digital Currency is not included in the aforementioned regulations, the RBI is required to amend the existing legislature to issue currency in digital form and allow it to be used as legal tender. Since the existing legislature was developed to accommodate the paper currency.
THE WAY AHEAD
In view of the increasing demand and rapid growth of digital payment mechanisms, there is an urgent need for the development of a new digital currency ecosystem and infrastructure, so that when and how the RBI Digital Rupee is introduced, it is able to flourish and survive the harsh modalities of the financial market in India.
The RBI Digital Rupee (“CBDC”) infrastructure will most likely be designed, developed, and operated by the RBI and the Securities and Exchange Board of India (“SBI”) considering its users will be able to use actual currency-backed UPI platforms or its Digital Currency cousins in the future.
Further, in order to take advantage of this new wave of digitization, the fintech businesses, big tech, and retail banks will have to modernize their platforms and develop new products and services.
Furthermore, a small-scale financial intermediary will not be able to compete with the RBI. Thus, the RBI will have to allow these financial intermediaries to continue to be responsible for the distribution of Digital Rupee via e-wallets or other pre-paid digital instruments and similar solutions.
AMLEGALS REMARKS
India is witnessing exponential growth in the use of digital payment systems in India and the growing dependence of customers on digital payment systems calls for an adequate legal framework.
The use of blockchain technology will provide seamless and transparent transactions as it will allow regulators to capture transactions on a real-time basis, which is not possible for the traditional methods used for transactions.
Therefore, the Central Government considering the risks associated with the cryptocurrency / Digital Currency introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“Crypto Bill”) in the budget session which aimed at banning the private cryptocurrencies in India and replacing them with an official Digital Rupee, which will be regulated by the RBI.
However, the existing regulations which govern and regulate the payment system in India were enacted with the intention to accommodate paper currency, and therefore, there is a need to amend the existing legislature to issue currency in digital form and allow it to be used as legal tender.
– Team AMLEGALS, assisted by Ms. Mehar Kaur (Intern)
For any query or feedback, please feel free to get in touch with arushi.vyas@amlegals.com or tanmay.banthia@amlegals.com.
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