India is set to join multiple other countries in embracing CBDCs to help regulate digital assets.
The Reserve Bank of India (RBI) is scheduled to discuss digital asset regulation once again, and changes could be announced during the next budget discussion in February 2022. According to Subhash Chandra Garg, the former Finance Secretary of India, central bank digital currencies (CBDCs) could be implemented in India to reduce the use of digital assets and stablecoins which, according to Mr Garg, “hurts government revenues”.
India has previously regulated digital assets and is now exploring potential new revenue streams for RBI
Digital assets are potentially of serious concern for governments, with Turkey and Nepal outright banning their usage. There are claims that the use of digital assets undermines authorities through the evasion of capital controls, and that they can destabilise the financial infrastructure of countries. India has exercised caution in the past, and has even threatened an outright ban on digital assets in 2017, subsequently prohibiting their usage in 2018. On 9 February 2021, India’s Finance Minister Nirmala Sitharaman told the Parliament that digital assets were not considered legal tender.
Despite their reservations about digital assets, discussions are being held about the implementation of CBDCs. According to officials, the move has been made to regulate—rather than ban—the sector and could bring in a significant revenue stream for the RBI. Though no draft of the digital asset bill has yet been made public, rumours suggest that the government is looking to classify state-controlled digital assets as a commodity and has created a committee to study how digital assets can be taxed.
CBDCs hold the power to regulate and centralise digital assets
Central banks worldwide, including China, Russia, the Bahamas, and the USA are currently developing or researching the use of CBDCs, which have the potential to be significantly beneficial for governments. Some suggest their development will streamline monetary policy and encourage financial inclusion by absorbing the unbanked into the financial system. Through the adoption of CBDCs, governments can regulate the decentralised nature of digital assets.
There are concerns with their usage, however, as the implementation of CBDCs could potentially impact the privacy of citizens. Their adoption within a country’s financial system could also have a negative impact on the stability of economies. Higher adoption rates may curb the flow and use of fiat currency and this could even lead to national currencies reducing in value. The RBI is being careful with their implementation by imposing limits, such as the amount of CBDC that can be held by any individual to avoid financial issues.
Digital assets are increasingly popular in India
Digital assets are a booming sector in India and there are currently over $15 million retail digital asset investors. The country ranked second in Chainalysis’ Global Adoption Index for 2021 and the market size is set to increase significantly over the next eight years—with research suggesting that it will grow by over 200% and be worth $241m by 2030. The Indian government are understandably interested in profiting from this market and CBDCs could allow for this. According to Mr Garg: “The return on investments that the platforms can make from the currency delivered to them is not currently accrued to the government.” Users will be obligated to use a government-approved digital currency through the implementation of a CBDC, which will curtail the use of digital assets.
CBDCs are likely to be adopted in multiple countries in order to regulate digital assets and allow governments to implement a central digital currency. India’s monetary policy committee is likely to implement CBDCs as early as 2022, with China and Sweden set to join them in this endeavour.
