BL Explainer: Digital Currency – The Hindu BusinessLine

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What is a digital currency?

As the name suggests, digital currency issued by the central bank is legal tender in digital form. It is also often referred to as central bank digital currency (CBDC). According to Reserve Bank of India (RBI) Deputy Governor, T Rabi Shankar, a digital currency is identical to a fiat currency and is exchangeable on a one-to-one basis with the fiat currency.

Only its shape is different. It appears as a liability or currency in circulation on a central bank’s balance sheet. Today, with the rise of digital payment methods, a digital currency should provide a convenient option for physical cash.

Is India getting a digital currency? Who will deliver him?

Yes, India is getting a digital currency in the new fiscal year 2022-23. Finance Minister Nirmala Sitharaman had proposed in the Union budget to introduce a digital rupee, using blockchain and other technologies, to be issued by the RBI.

The introduction of the CBDC will give a big boost to the digital economy, she said, adding that it will also lead to a more efficient and cheaper currency management system. The RBI has been working on a retail and wholesale CBDC for some time now. The Money Bill proposed to amend Sections 2 and 22 of the RBI Act of 1934 to clarify that CBDCs would also be considered banknotes.

Has another country issued a digital currency?

Yes, amid the rise of private cryptocurrencies, a number of countries around the world are planning to launch their own digital currencies, which are considered by many to be the future of money. According to the Atlantic Council, at least nine countries have launched their own CBDC, with Nigeria launching the e-Naira.

China has also launched its digital yuan while many countries are conducting pilot projects. The US Fed and the European Central Bank are also studying and working on their own CBDCs. In fact, a recent survey by the Bank for International Settlements (BIS) found that 86% of central banks were actively considering it.

What is the difference between digital currency and cryptocurrency?

A digital currency is issued by the central bank while cryptocurrencies such as Bitcoin and Ethereum are private and do not have issuers as such. According to the RBI, a digital currency is not comparable to private virtual currencies, which are at odds with the historical concept of money.

“They are not commodities or claims on commodities because they have no intrinsic value,” Rabi Shankar had said. Private cryptocurrencies are also unregulated and decentralized and tend to be highly volatile. In contrast, a CBDC will have the same value as paper currency and will be regulated and issued by the central bank. However, the digital rupee as well as private virtual currencies are based on blockchain technology.

Are cryptos such as Bitcoins and Ethereum legal in India?

The Union Budget 2022-23 proposed a tax regime for virtual digital assets, including cryptocurrencies and non-fungible tokens. However, the Minister of Finance clarified that taxing these assets does not automatically bring legitimacy.

A separate consultation process is underway regarding their regulation and prohibition. A bill on this subject would be tabled in Parliament. However, the industry remains hopeful that with the budget proposals on taxation, cryptos will eventually be legalized. But for now, cryptos continue to be in the gray zone in terms of regulation.

So what happens to people who have invested in cryptos?

For now, people can continue to trade and invest in cryptos as before, but they will have to pay taxes under the new proposals. It is pertinent to note that most investors were already paying taxes on their crypto investments.

Crypto exchanges say there has been no significant change in investor behavior since the budget announcement, but they hope the Treasury will cut the high 30% tax rate along with the TDS from 1%. Experts believe that the high taxes are meant to discourage crypto trading.

Published on

February 04, 2022

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