Union Budget 2022: RBI to Issue Digital Rupee based on Blockchain Tech

Finance Minister Nirmala Sitharaman has made her Budget presentation in the parliament today. Of the key tech-related announcements, digital rupee will be introduced by RBI in 2022-23. The central bank digital currency (CBDC) by RBI will be based on blockchain technology.

“Digital currency will also lead to a more efficient and cheaper currency management system. It is therefore proposed to introduce a digital rupee using blockchain and other technologies, to be issued by the Reserve Bank of India, starting 2022-23,” the FM said.

Harish Prasad, Head of Banking, India, FIS, a provider of technology solutions for merchants, banks and capital market firms globally, says that the launch of India’s CBDC, the Digital Rupee, during 2022-23 is a much awaited and positive move.

“This will trigger a wave of preparatory activity amongst retail payments providers and apps to offer payment mechanisms using the Digital Rupee, along the lines as been seen in China with major Digital payments players and apps offering Digital Yuan payments via their apps. There will likely be a similar model that will be seen in India to support adoption and use of the Digital Rupee, which is paramount for its success.”

“Another effect of this in the slightly longer term could be that the dependence on UPI for small value payments could potentially reduce with the Digital Rupee gaining traction in time. Given the level of growth being seen on UPI and the associated stress on technology infrastructures of issuers and banks, this may be a good thing after all,” says Prasad.

What will be keenly awaited though is clarity on digital currency owner identification and any associated reporting requirements for payments apps, and whether the anonymity that physical currency enables is an attribute that will be supported in the Digital Rupee, he states.

Rajosik Banerjee, Partner and Head, Financial Risk Management, KPMG in India too believes, “Digital Rupee using blockchain technology will lead to stable, efficient, regulated payments and settlements and lowered transaction cost. This initiative is expected to boost the digital economy and reduce leakages by lowering dependency on cash.”

Jai Prakash, Co-founder & CEO, VRXtream too welcomes the RBI’s decision to introduce the Blockchain powered Digital Currency. This would certainly give an impetus to the participation of institutional players in the blockchain space. Also the announcement of 30% tax on the transfer gains of digital assets is most welcome as it establishes the legitimacy of crypto trading in India. Hoping to see that as the new class of assets finds more traction with the people, cryptocurrencies are recognised and widely adopted as the alternative investment vehicles.”

RBI had expressed its desire to introduce a digital currency last year. At the time, the government was planning to ban the use of cryptocurrencies in the country. However, things were stalled after a committee was formed to hold talks with major stakeholders and give recommendations on the future of cryptocurrencies in the country. Later, the draft of crypto bill suggested that the government may still ban all cryptocurrencies in the country to promote a possible digital currency from the RBI.

“To create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India. However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses,” the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 read.

In this budget however, no clarity was provided on the future of Bitcoin and other crypto tokens. Nonetheless, Ms. Sitharaman surprisingly announced in her Budget 2022 presentation that a new crypto tax will be introduced under which virtual digital assets will be taxed at 30 per cent in the country. She clarified that no set off will be allowed in case of losses. Also, gifts in virtual digital assets would be taxed in the hands of the recipient, making crypto official as against a ban

Om Malviya, President, Tezos India, which builder of the Tezos Blockchain  said, “We are happy to note that the FM has announced crypto tax provisions in this budget, legitimising crypto transactions in some way. However, it is disappointing to see that the Government has decided that the income from the transfer of digital assets will be taxed at 30 per cent — which seems to be too high, given that the NFTs, cryptocurrencies and digital assets space is already booming and has immense potential for the economy in the near future. I am hopeful that once the full potential of crypto is realized it will be lowered further.”