The impact of a new digital currency launched by the RBI

Starting July, the RBI has banned Indian banks from providing services to individuals and businesses dealing with virtual currencies. This has delivered a blow to the cryptocurrency market in India which is speculated to have a valuation around $2 billion – $25 billion. The RBI is taking increasingly regulatory methods against cryptocurrencies in India. Previously this year, the Income Tax Department had sent notices to 1 lakh individuals in India who had not included their cryptocurrency transactions in their tax reports. This staggering move by the RBI was an attempt to reduce cryptocurrency frauds and tax evasions by individuals.

Taking lead from other nations like China and Ecuador, the RBI plans to introduce its own digital currency. According to RBI officials, a digital currency launched by the RBI will help to increase inclusion in the banking system. However, the impact of RBI’s move to ban banks from dealing in cryptocurrency and its plan to introduce its own digital currency can have overwhelming multifold effects.

The addition of digital currency into the economy alongside paper currency can have a chaotic impact on the entire eco system. According to Gresham’s law, when there are two currencies in the economy at the same time, one currency is overvalued above its face value. This leads to simultaneous exchange from the undervalued currency to the overvalued currency until only one currency remains in the economy. Considering, the price speculations in digital currency, it is possible that it will be overvalued, and people may only want to hold that, thereby reducing the demand for currency notes staggeringly. The impact of having two legal tenders at the same time is chaotic.

Cryptocurrencies like Bitcoins have to be mined, but how can the RBI let its digital currency be mined? This in itself would cause a difference in the valuations of paper notes and digital currency creating further problems. Also, the digital currency being legal tender cannot simply be mined by private individuals. There are also questions about how the RBI will circulate this digital currency and how will the exchange rates with other legal tenders be determined. There are various decisions which will have to be taken by the RBI that are crucial and once made cannot be changed easily to keep up with future developments.

The exact difference between a digital currency launched by the RBI and other methods of payment like credit cards, debit cards and PayTM is difficult to decipher. The new digital currency will be regulated by the RBI, hence unlike other cryptocurrencies there will be a trail which will lead the government back to the transaction. Also, the transactions would come under the income tax radar, hence unlike other cryptocurrencies, there may be no privacy of the digital currency holder. Moreover, the government will have to be very careful to prevent data leaks and scams, considering the recent Facebook data breach involving 87 million users worldwide. There will be pressures on the government to uphold the safety of data of the digital currency holders. This may be a challenging task.

If the government decides to not launch the digital currency while it bans banks from converting cryptocurrency to paper currency, the government will lose out on the benefits of blockchain technology. This will lead to a massive brain drain in the country. People who are well versed with blockchain technology and intend to research that area will move to other countries where the potential of cryptocurrencies are open to explore. Hence, we will be losing massive brain power from the country.

The impact of banning banks from converting cryptocurrency to legal tender may not be very effective. The number of cryptocurrency owners in India is estimated to be around 100 lakhs. Even if the RBI bans banks from making transactions in cryptocurrency, this will only reduce the conversion of cryptocurrency to paper currency. There will still be over the counter trading and the dealers of crypto-currencies could just move to other countries where crypto-currencies are still accepted. Though, the decision by the RBI mandated to banks to not deal with cryptocurrencies after 3 months gave a hit to the cryptocurrency market and the valuations of different cryptocurrencies plunged by around 25%, the market is recovering at a steady pace. Though speculators believe that there is a lot of money in the cryptocurrency market which is stuck because of the decision (estimated at $12 billion), there still may be cryptocurrency dealers who can sell their currencies to global exchange markets to convert them to paper currency which would be deposited in their accounts. The decision by the RBI will not impact crypto-currency holders in India massively, they could exchange cryptocurrency in other countries.

To conclude, even if the RBI bans the conversion of crypto-currency to Indian rupees, there are channels by which it can still be converted. International exchanges can be used to do this. Also, if the RBI launches its digital currency, it will unleash steady chaos with there being two legal tenders. Moreover, there may end up being no difference between a Debit card and a digital currency in that case. Hence, the launch of a digital currency in India may not be beneficial or impactful.

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Vidhi is an Economics and Finance major and is in her third year at Ashoka. She is interested in Macro-economics and believes that good economic policies can change the face of the nation and improve the quality of life of millions. She is also a trekking enthusiast and absolutely loves to travel. Mountains are the love of her life. Simplicity in people baffles her.

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