India’s government said yesterday it plans to launch a digital version of its national currency later this year or in 2023.
The country’s finance minister, Nirmala Sitharaman, said in her budget speech that a digital rupee would help promote economic growth.
“The introduction of a central bank digital currency (CBDC) will give a boost, a big boost to (the) digital economy,” Sitharaman said.
“Digital currency will also lead to a more efficient and cheaper currency management system,” she went on.
India’s CBDC plans add to a growing East-West divide over state digital currency, with China and India at the vanguard of the movement while the US and the UK question the need for a CBDC.
China and India are the world’s two largest countries by number of people, each with a population of around 1.4bn.
“A CBDC will give a boost, a big boost to the digital economy”
China is currently trialling its electronic yu’an (‘e-CNY’) in 12 Chinese cities and regions, as well as the host cities for this month’s Winter Olympic Games, Beijing and Zhangjiakou.
In a speech last year, T Rabi Shankar, deputy governor of India’s central bank, the Reserve Bank of India (RBI), said that the introduction of a CBDC made sense given India’s high-tech payments infrastructure and the rise in interest in competing, private versions of digital money.
“India is leading the world in terms of digital payments innovations,” said Shankar.
“Its payment systems are available 24/7 to both retail and wholesale customers, they are largely real-time and the cost of transaction is perhaps the lowest in the world,” he said.
A decade ago, Indians relied largely on cheques to move money around the country, a legacy of the colonial era.
Now India operates what is seen by many as the most advanced digital payments system in the world, having leapfrogged Western nations in the process.
Last month, researchers at the Bank for International Settlements (BIS) said that India’s introduction of a national digital identity infrastructure, together with a new payments system, had helped slash the cost of digital payments in the country.
During the last decade India introduced a new country-wide ID scheme, called Aadhaar, and a new payments infrastructure, called the Uniform Payments Interface (UPI).
According to the BIS researchers, the cost of opening a new payments account in India has fallen from $15 to 7 cents as a result.
According to the RBI’s Shankar, the introduction of CBDCs makes sense in emerging economies, since these countries are at higher risk of seeing local currency deposits disappear into the cryptocurrency market, where privately issued ‘stablecoins’ linked to the dollar now command over $130bn in assets.
“The advent of private virtual currencies (VCs) may well be another reason why CBDCs might become necessary,” Shankar said.
“If these VCs gain recognition, national currencies with limited convertibility are likely to come under threat,” he said.
Two weeks ago, Russia’s central bank called for a ban on cryptocurrencies in the country, citing the risk of a similar capital flight, which it called ‘cryptoisation’.
However, according to Bloomberg, President Putin then backed a Russian government proposal to tax and regulate cryptocurrencies, rejecting the central bank’s proposal to ban them completely.
On January 20 the US Federal Reserve set out its thoughts on a possible future digital dollar, but said it hadn’t decided whether a US CBDC might be necessary.
On 13 January, an influential economic committee of the UK’s House of Lords released a report in which it said there is no convincing case for the UK to have a CBDC.
At the same time as announcing the country’s digital currency plans, India’s finance minister said she would introduce a new tax on cryptocurrency gains at a flat 30 percent rate, without allowing any setoff against losses. India will also charge a one percent tax on every cryptocurrency transaction.
“This is India’s way of saying ‘cryptocurrencies, you are not welcome’, and by the way there is no free lunch,” said Naren Nagpal, CEO of APAC Consulting Group, commenting on the budget.
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