RBI seeks legal amendment to make digital currency legal tender

The Reserve Bank of India (RBI), which has for long expressed reservations against cryptocurrencies, has now proposed to include digital currency under the definition of a ‘banknote’. The government said on Monday it has received a proposal in this regard from the RBI.  Last month, the central bank had introduced the proposal for a Central Bank Digital Currency (CBDC).

A banknote, Investopedia defines, is a central bank’s promissory note which one party can use to pay another for a specific amount of money. It is payable to the bearer on demand, and the amount payable is apparent on the face of the note, it says. Banknotes, along with coins, are considered legal tender.

CBDCs, referred to as digital or virtual currencies, are the digital form of regular currencies such as the rupee. An ANI report said the RBI has been looking at use cases for CBDC, and developing a phased implementation strategy.

Potential benefits

In a written reply to a query in the Lok Sabha, the Finance Ministry said: “The introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk.” Further, they would help develop a robust, trusted, regulated, efficient and legal tender-based payments option, it added.

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There are certain risks that “need to be carefully evaluated against the potential benefits”, the ministry noted. The government has “no proposal to recognise Bitcoin as a currency in the country”, it added.

Earlier this month, Prime Minister Narendra Modi held a high-level meeting with representatives from the Finance Ministry, the RBI, and the Securities and Exchange Board of India (SEBI), where cryptocurrencies were reportedly discussed.

Regulatory moves

Last week, the government said it would introduce a Bill in the winter session of Parliament, which began today, to regulate the digital assets. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 would, nevertheless, allow select promotion of the underlying blockchain technology and its usage, said agency reports.

Crypto prices in India have seen big fluctuations in the midst of the regulatory ambiguity. However, industry players have more or less remained upbeat on its potential in the country.

The RBI has frequently raised alarm over cryptocurrencies and their ability to destabilise the financial system. Its outright attempt to ban them in 2018 fell through because the Supreme Court ruled against it.