The Finance Act 2022 has already paved way for the RBI to launch CBDC, said a ministry of finance official
The exchanges have not been fully compliant and transparent in their operations, and there has been a significant flow of unaccounted money (in crypto) from India to other countries, he alleged
It’s unfortunate that the industry didn’t rise to the challenge but 1% TDS is still not the solution, commented Ajeet Khurana, former CEO, of Zebpay
The Reserve Bank of India (RBI) has been working on the Central Bank Digital Currency (CBDC) for the last few years and it will be launched ahead of the crypto bill enactment in the parliament, said a finance ministry official who did not wish to be named.
The draft Crypto Bill was supposed to pave way for CBDCs too. Just like the rupee notes, a paper contract in which the RBI governor promises to pay bearer the mentioned amount, a CBDC is defined as the legal tender issued by a central bank in a digital form.
“It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different,” deputy governor of RBI T Rabi Shankar had earlier explained.
According to a finance ministry official, the Reserve Bank of India Act has already been amended in this regard and the Financial Act 2022 equipped the central bank to launch CBDC.
“We have been closely monitoring the international regulatory developments as well as what’s happening in the Indian market. Crypto is still evolving. While the draft Bill needs to adequately address subjects like metaverse, web3, DeFi, gaming and other areas, CBDC simply can’t wait,” the official added.
The Financial Act 2022 had earlier inserted a new Section 22A in the Reserve Bank of India Act, 1934 and amended Sections 2 and 22 of the Act. It proposed that CBDCs should also be regarded as bank notes.
The RBI governor Shaktikanta Das has announced plans to launch CBDCs by the end of FY 2022-23.
On CBDC use cases, deputy governor Shankar earlier elucidated that there is a unique scenario of the increasing proliferation of digital payments in the country coupled with a sustained interest in cash usage, especially for small value transactions. To the extent the preference for cash represents a discomfort for digital modes of payment, CBDC is unlikely to replace such cash usage. But if we talk about the reasons such as anonymity, preference for cash for its anonymity can be redirected to acceptance of CBDC.
“India’s high currency to GDP ratio holds out another benefit of CBDCs. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced,” Shankar added.
Shankar has also stated that the rise of cryptocurrencies can be another good reason for India to adopt CBDCs. With CBDCs being stable as fiat currencies, It could also protect the public from the abnormal level of volatility some of these crypto experience. Indeed, he argued that this could be the key factor nudging central banks from considering CBDCs as a secure and stable form of digital money.
India’s Crypto Future In Jeopardy
The Indian crypto industry has been constantly asking for a favourable crypto law in the country. In 2022, instead of introducing a completely new law, the Indian government imposed taxes such as 30% tax on benefits arising from every crypto trading, and 1% TDS on each transaction.
This has brought the Indian crypto ecosystem back to the 2018 scenario when dozens of crypto exchanges had to suspend their operations.
The finance ministry official however puts the blame back on the crypto stakeholders stating that multiple crypto startups are not fully compliant on multiple accounts and thus failed to win the trust of the government.
Crypto Exchanges Have Failed To Meet The Obligations
The crypto industry representatives have interacted with the ministry officials in the past.
“However, many of these crypto companies have not been fully transparent in terms of their operations. Though they claim to be fully KYC-compliant, they are not. There is another big concern that is the overall flow of transactions. There has been a significant volume of transactions happening from Indian addresses to outside ones. There was no control, no information with regards to where these funds are being transferred,” he added.
Earlier this week, the Enforcement Directorate summoned CoinDCX and CoinSwitch Kuber seeking documents in connection with a possible case regarding Foreign Exchange Management Act violations.
Besides ED, GST Commissionerate is also investigating against half a dozen crypto companies including CoinDCX, CoinSwitch, WazirX and others.
Ajeet Khurana, founder of Singapore-based web3 advisory services firm Reflexical and former CEO of Zebpay said, “It’s deplorable that the industry did not rise up to the challenge. However, this does not justify the imposition of 1% TDS. I don’t think this is the solution to it. It is like saying that the child is not being able to carry a five kg bag to school. So I will make 10 Kg bag for him. It isn’t solving the problem.”
Meanwhile, a number of startups may have to suspend their operations citing as 1%TDS and the crypto winter together have made it difficult for them to continue. While Vauld has already shut down its shutter, some others too may have to have suspended their operations temporarily or permanently which we will discuss in the other story in detail.
