India Should Abandon Its Suspicion Of Digital Currency

Context: Call to re-consider India’s aversion to cryptocurrencies and embrace the opportunities.

Concerns over cryptocurrencies

• Speculative nature and highly volatile investments.
• Limiting scope of law enforcement agencies to track down criminals.
• Cannot serve fundamental function of a currency of storing value as they are highly unstable.
• Radical nature as purely permissionless system has no need of banks to register each transaction.
• Overlooks role of Central bank in maintaining financial health of economy through economic interventions.
• Integration of digital currencies into traditional financial paradigm bound to run into multitude of challenges.

Indian policy response to cryptocurrencies

• Prohibition: In 2018, the Reserve Bank of India prohibited regulated entities from providing services that deals with or settles trades in any virtual currency.
• Resurrection: In 2020, Supreme Court lifted this restriction.

Advantages of cryptocurrencies

• Opportunities for innovation: E.g. Digitally native currencies are programmable and capable of being incorporated into smart contracts
• Ideal for financial inclusion: As they can be directly allotted to citizens who don’t have a bank account
• Digitally auditable: Transactions can be audited, reducing scope for illicit activity.

Way forward: Integrating the best that digital currencies have to offer into the traditional financial paradigm.

• Thinking digital currencies as just another asset—the digital equivalent of a scarce commodity that, like gold, certain collectors prize.
• Central bank digital currency (CBDC): A digital currency that functions as an electronic representation of a country’s fiat currency.
  • Added advantages: Programmability and security of cryptocurrencies and the reserve-backed stability of fiat currency.
  • E.g. In 2020, the Bahamas introduced the Sand Dollar, while Sweden’s Riksbank began testing its eKrona CBDC as a proof of concept.