By Shantanu Jindel
If the Union Budget 2022 is a precursor to Government’s stance on digital assets, then one could use the term ‘step-childly’ to describe the treatment. Because while the Finance Minister has acknowledged the existence of digital assets, a hefty tax in the form of the following has been imposed: (a) income from transfer of any virtual digital asset to be taxed at the rate of 30%; (b) no deduction in respect of any expenditure or allowance to be allowed while computing such income except cost of acquisition; and (c) loss from transfer of virtual digital asset cannot be set off against any other income.
Further, as per the budget speech of the Finance Minister, the RBI will introduce Central Bank Digital Currency (CBDC) in 2022-23. This will be aimed at creating a more efficient and cheaper currency management system. While India would not be the first country to take a step in this direction, it would be interesting to see what impact does the India CBDC have on other digital assets. For example, while the US is also contemplating releasing its CBDC, it also allows other cryptocurrencies to co-exist. On the other hand, while China plans to issue its digital currency, it has banned the other cryptocurrencies. In India, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Bill) was introduced in the Lok Sabha. According to the Lok Sabha bulletin dated November 23, 2021, the Bill seeks ‘to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses‘. While the fate of the Bill will remain unknown for some time, what seems to be clear is that unlike the US, the Indian regulators may not yet see it as a fit in the economic and monetary policies of the country.
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Going back to the US, recently, the Board of Governors of the Federal Reserve System (alias ‘Fed’) released a research and analysis paper titled: Money and Payment – The US Dollar in the Age of Digital Transformation. The paper is aimed at promoting discussion between the Fed and stakeholders about CBDCs. The paper also clarifies that it is not intended to advance any specific policy outcome, nor is it intended to signal that the Fed will make any imminent decisions about the appropriateness of issuing a U.S. CBDC. Therefore, while the intent of the paper seems to evoke reaction to the concept of CBDC, the Fed does not want to ‘lead-on’ yet.
The paper defines CBDC as a digital liability of a central bank that is widely available to the general public. However, a CBDC would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on backing by an underlying asset pool to maintain its value. Therefore, it would be interesting to understand how would the regular currency and CBDC exist simultaneously or would CBDC (if implemented) eventually replace the physical currency over time.
For the Fed, a CBDC would essentially need to have 4 elements: (a) Ability to protect privacy; (b) Requirement of Intermediaries; (c) Free transferability; and (d) Ability to carry out identity verification to combat evils like money laundering and the financing of terrorism. One would need to wait for the concept of CBDC to evolve before fully understanding what incremental value it will add to the existing digital payment systems in place. Because, if RBI is pitting a CBDC and seeking to ban/regulate cryptocurrencies, then CBDC will need to do more than just ‘speed up’ digital transactions.
While the RBI seems to be working out a phased implementation strategy for introduction of India’s version of a CBDC, this CBDC should not be a crypto-killer. The recent meltdown of crypto markets is an indication that it will take some time before cyptocurrencies garner faith of public as a reliable store of value, however – not giving them a chance as a tradeable asset class would be at best an example of over-regulation. On this account, the RBI could take leaf out of Fed’s paper and explore how national digital currency and other crypto-assets can co-exist. What RBI must also appreciate is that India cannot afford to be left behind in crypto-led and crypto-enabled technological advancements in a world moving toward web 3.0.
(The writer is Partner at JSA. Views expressed are his own)