Highlights:
- The RBI is exploring tech solutions to address privacy concerns in the digital rupee while showing neutrality towards potential tax reductions on cryptocurrencies.
- Recent milestones in retail CBDC transactions highlight growing urgency, with banks’ involvement suggesting potential scalability challenges and the need for ongoing experimentation to ensure security and efficiency.
- The RBI may involve startups in CBDC development.
According to a source within the Reserve Bank of India (RBI), the institution is actively exploring technological solutions to address privacy concerns related to the digital rupee.
While the RBI maintains a cautious approach toward cryptocurrencies, the source indicates that it would not oppose any potential reduction in the contentious tax burden affecting the crypto industry if such a decision were made by the government. It’s worth noting that tax legislation falls outside the RBI’s jurisdiction, though the bank has previously attempted to ban cryptocurrencies
Since late 2022, the RBI has been advocating for the adoption of wholesale and retail Central Bank Digital Currencies (CBDCs), initiating pilot programs. While the central bank has publicly stated that it is not rushing to implement a full-scale retail CBDC and has not provided a specific timeline, recent developments suggest a growing sense of urgency.
Recent data implies a milestone for the retail CBDC, with a million transactions processed in a single day, albeit with support from commercial banks. Some banks reportedly redirected employee funds and benefits into CBDCs to aid in achieving this milestone, although it remains unclear if this practice will continue or if daily transaction volumes have sustained. The banks involved declined to comment on these developments.
An official emphasised that the development of a CBDC requires extensive experimentation and effort to ensure its security and efficacy for the nation. While settlement mechanisms pose fewer challenges, addressing latency remains a priority.
The issue of privacy in CBDC usage has been a global concern, with the RBI introducing a narrative that adds complexity to this debate. While discussions have included proposals for legislation allowing customers to delete transactions for anonymity, the central bank is also exploring technological solutions to enhance privacy protections.
Regarding taxation, the RBI, historically a staunch opponent of cryptocurrencies, indicated it would not interfere if the Indian government decided to lessen taxes on crypto transactions. The RBI’s focus remains on regulatory matters rather than taxation, and it has previously expressed concerns about the potential impact of reduced taxes on India’s monetary stability.
Despite that, the recent interim budget did not include changes to crypto taxation, with the possibility of revisions in the full budget expected later in the year. The crypto industry, particularly advocating for a reduction in the 1% tax deducted at source (TDS), may find hope in future budgetary decisions.
The RBI’s stance on cryptocurrencies remains unchanged, even amidst global developments such as the approval of spot bitcoin exchange-traded funds (ETFs) by the United States. RBI Governor Shaktikanta Das emphasised India’s unique economic challenges, suggesting caution regarding crypto-related risks.
Looking ahead, the RBI’s CBDC pilots may involve collaboration with startups, with potential contributions to technological advancements and addressing challenges in the evolving CBDC landscape. While other countries have engaged private organisations in CBDC exploration, India has primarily kept this endeavour internal, led by its central bank’s fintech department.