Why is it important for India to have its own digital currency?

Published on: August 09,2021 10:50 IST

By Athik Saleh


The word ‘crypto’ originated from the Greek work kruptos that means ‘hidden,’ while the word currency is of Latin origin that means something that flows from one person to another. Together, they form ‘cryptocurrency’ – a word that has caught the imagination of people across the globe.

This hidden currency is a hot topic in the town. To categorize it as new will be unwise, as we all have been hearing about cryptocurrency for a long time now.

The first cryptocurrency, Bitcoin, was found by a person (or person) called Satoshi Nakamoto. However, this idea to create a mode of payment that is safe and secure than the normal currency came up much before 2009, the year Bitcoin was discovered.

The first appearance of the word ‘cryptocurrency’ in the public domain is not earlier than 1998. However, the idea to create a virtual currency based on cryptography was first proposed by American computer scientist David Chaum, a pioneer in cryptography.

Since the advent of Bitcoin after the global financial crisis of 2008, this topic has been the subject of discussion amongst economists, computer scientists, political leaders, and normal people alike.

The idea that a form of currency that does not have any physical existence and is completely decentralized first fascinated everyone. With time, however, it began to make the authorities wary about the potential harm that such a currency might do.

Cryptocurrency, especially Bitcoin, was first illegal in many countries but with its growing popularity, most countries have taken a fairly friendly stand towards it.

Some countries like El Salvador, Paraguay, etc. have made it explicitly legal. On the other hand, in countries such as China, a transaction using Bitcoin and other cryptocurrencies are made illegal.

Then there is another group where cryptocurrencies remain unregulated. People use them for transactions, but those transactions are not regulated or protected by any law. Neither are there laws that make them illegal. India is one such country where Bitcoin and other cryptocurrencies remain unregulated.

In India, however, in the last few years, there has been growing concerns amongst the Government and the Reserve Bank of India regarding transactions using cryptocurrency and its legality in the country.

The Government is at liberty to ban it, but it has not yet banned it and that is because of how both the Government and the Central bank feel about the underlying technology behind cryptocurrencies – blockchain.

The fact that cryptocurrency is an area where no country is ahead of another and is a level playing field for any country to take advantage of the comparative newness is something that would make India an interested party.

There have been so many times in the past where India had to play the catchup game but, in this instance, it can either go ahead of others or be at least on par with others.

Recently, India’s central bank, the Reserve Bank of India has talked about exploring the possibilities of launching its own cryptocurrency – Central Bank Digital Currency (CBDC).

In this scenario, it is imperative to understand why it is necessary for India to have either have a cryptocurrency of its own or make provisions regarding the same.

What is Reserve Bank’s proposed CBDC?

One of cryptocurrencies greatest advantage is that it is completely decentralized. There is not issuing authority involved. However, this, in turn, is its greatest disadvantage as well. This inherent decentralized and unregulated nature of cryptocurrencies is one thing that put every government and central bank at unease.

The Indian Government has had a mixed relationship with cryptocurrency. In the beginning, it has been of the opinion that assets such as cryptocurrencies should not be used as a mode for transactions.

In reply to a question asked in parliament regarding the legality of cryptocurrency in 2018, the then Union Minister of State for Finance Anurag Thakur said that the Government did not consider cryptocurrency as legal tender.

The Reserve Bank of Indian, in the same year, issued a circular that asked every entity under the regulation of RBI to not provide any services related to virtual currency. It prohibited the banks from aiding any transaction involving virtual currency.

The Supreme Court, however, in Internet and Mobile Association Vs RBI[1] held that such a ban imposed by RBI in the absence of any legislation regarding the same is disproportionate in nature. The Court was of the opinion that such a circular by the RBI will infringe upon the fundamental rights of the citizens to carry on a trade.

This judgement from the Court was not an endorsement for cryptocurrency but a judgement based on the basic principle of separation of power as it is the role of the legislature to make law.

When certain banks in 2021 denied banking services to those involved somehow with cryptocurrency citing the 2018 RBI circular, RBI had to step in to clarify how that circular became redundant after the Supreme Court judgement.

It is in this light RBI’s plan to bring into the market its own digital currency must be looked at. Since cryptocurrencies are something that encroach upon one of the key functions of a central bank, that is, issuing currencies, CBDCs have become a topic of discussion. Countries like China, Russia, The U.S, etc. have been working on creating their own digital currency to thwart the issues created by cryptocurrencies. India is an entrant to this group of countries after the announcement from RBI.

CBDC proposed by RBI will be another form of sovereign currency. It will be in digital form. Much of CBDC’s behaviour and characteristics will be determined by the way it will be designed. They will be based on the underlying ledger technology behind cryptocurrency.

They will be used as an alternative to fiat currency in a country. This digital currency will be accessible by anyone and the person will have a claim on the central bank.

Why Does India need its own Cryptocurrency?

  • To be one of the most important players and control competition

While the world, especially the developed countries, went through various economic changes such as the industrial boom or the technological boom, India remained a passive viewer. India always played the catch-up game when it came to various changes the world went through.

However, cryptocurrency is a comparatively new domain. Most countries are in the stage of developing their own government-backed cryptocurrency. No one, except for the already existing cryptocurrencies has an advantage.

If India were to create its own cryptocurrency/digital currency, it will be one of the important players in this market and will be able to control the competition.

  • Benefit India’s Digitization run

One of the main benefits of the proposed CBDC by the RBI is how it will benefit India’s digitization run. In the last couple of years, we have seen a lot of trends such as e-KYC, Jan Dhan accounts, and Aadhar by the Indian Government that seeks to lead India towards a cashless economy.

One of the key issues regarding these trends is that the involvement of third parties such as banks makes the transaction costly. With the help of sovereign digital currency, the intermediaries will be out of the picture and the transaction will be devoid of the intermediary charges.

  • Streamlining financial transactions

The introduction of CBDC will be another step towards streamlining financial transactions. The UPI-based payment system has been effective, but the fact is that UPI based transaction is between two banks. On the other hand, a transaction based on digital currency will be between two people or entities.

This will be beneficial for small merchants. India’s digitization drive has made many adopt steps like POS but the reality remains that most small-time merchants incur an inflated cost when using these machines. An economy driven by digital currency will alleviate this issue as the operation costs of businesses will come down significantly.

  • Private cryptocurrency

An interesting term used by RBI to distinguish its proposed digital currency from the already existing ones is “private cryptocurrency.” It is clear from the usage of this term that RBI is trying to curb the issues that arise with the usage of cryptocurrencies.

The decentralized and anonymous nature of cryptocurrency has been a thorn in the minds of regulators ever since Bitcoin began to make noise. A digital currency with central banks’ backing can and will alleviate this issue. Although it will lack the anonymity provided by private cryptocurrencies, it will still be secure enough to tackle issues like identity thefts, data leaks, etc. faced by banks and other financial institutions.

At the same time, it will be devoid of the issues such as fraud that are rampant in the cryptocurrency market.

  • Convenience

Convenience is another factor that must be kept in mind when it comes to CBDCs. Not only will it make domestic transactions convenient, but it will also make cross-border transactions convenient as well. The transactions that usually takes 5 days at most will be done at lightning speed.


We have seen what central bank digital currency is and why India needs a central bank digital currency so far. However, most of the benefits that can be reaped using CBDC will be entirely dependent on the way it will be designed by RBI.

Decisions must be made regarding the characteristics of CBDC. It can be either used for retail payments (peer-peer) or will be limited to wholesale payments (between banks and financial institutions) or both.

Decisions have to be made regarding the role of banking institutions in a financial ecosystem with digital currency as the introduction of digital currency will affect bank’s role. It will also affect the availability of credit in the banking system.

Another area that will need deliberations will be the extend of the role played by RBI. Will it take an all-encompassing role, or will it resort to outsourcing of its functions?

Although there are a lot of questions regarding the framework, CBDCs will be a step in the right direction for India globally. As one of the leaders in digital payments, the introduction of a sovereign digital currency will be able to enhance privacy and can attract investments.

It will lead to an environment where the transaction will be conducted a lot smoother than it is now. It will also enhance India’s role in devising a global digital currency that may make future cross-border transactions easier.


  1. Internet and Mobile Association Vs. RBI, 2020 SCC OnLine SC 275

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