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RBI’s latest circular on cryptocurrencies

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    3rd Jun, 2021

Context

The Reserve Bank of India (RBI) on May 31 clarified that the banks and other regulated entities cannot cite its 2018 circular on cryptocurrencies as it has been set aside by the Supreme Court (SC) in March, 2020.

The clarification from the central bank will come as a sign of relief for all investors and crypto exchanges in India who invested in virtual currencies.

Why RBI’s clarification is important

  • It comes at a crucial time as the government is in process of framing rules to either ban or regulate cryptocurrency trade in the country.
  • It will directly help crypto exchanges that have been facing a lot of bottlenecks in their negotiations with banks.
  • A few days ago, a report indicated that the government is planning to set up a new expert committee to re-examine all aspects of crypto trade.
  • An earlier committee headed by former finance secretary Subhash Garg in 2019 recommended a blanket ban on cryptocurrency trade. Thus, the circular is an indication that the government is looking to soften its stance on cryptocurrency trade and go for regulation rather than a ban.

Cryptocurrency

  • Cryptocurrency is decentralised digital money, which works based on blockchain technology. Bitcoin and Ethereum are the popular crypto currencies but there are thousands of cryptocurrencies in circulation.
  • Even as the RBI and the Government have not formed an opinion on the cryptocurrencies, there are many Indians who have taken exposure in crypto market. According to data from crypto exchanges, there are approximately 1.5 crore Indians who have invested in cryptocurrencies holding Rs 15,000 crore.
  • There are 350 startups who operate in blockchain and crypto. Crypto exchanges, WazirX, CoinSwitch Kuber and other exchanges, have seen a big rush in demand from users and crypto exchanges are advertising heavily on investments.

Central bank digital currency

  • It uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation.
  • A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
  • Also called digital fiat currencies or digital base money, CBDC will act as a digital representation of a country’s fiat currency, and will be backed by a suitable amount of monetary reserves like gold or foreign currency reserves.
  • Each CBDC unit will act as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account.
  • Like a paper-based currency note that carries a unique serial number, each CBDC unit will also be distinguishable to prevent imitation.
  • Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes, and bonds.