INDIA’S STANCE ON GLOBAL DIGITAL CURRENCY REGULATIONS IN 2024

This article has been written by Parijat Banchhor, final year law student. Pursuing B.A,LL.B(H) from Amity University Raipur Chhattisgarh.

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ABSTRACT

“Crypto currency is freedom. It’s a return to a system of money that is governed By rules – not rulers.” – Erik Voorhees, Shape Shift founder

The transformation from traditional to digital currency systems marks a pivotal shift in global finance, with emerging economies like India playing an increasingly significant role. This paper examines the evolution of currency systems and regulatory frameworks, with particular focus on India’s implementation of Central Bank Digital Currency (CBDC). The study traces monetary evolution from ancient barter through medieval innovations to modern digital currencies, analyzing how technological advancement has reshaped financial systems. Research findings demonstrate that India’s phased implementation of the Digital Rupee (e₹) represents a balanced approach between innovation and regulation, characterized by a two-stage rollout wholesale segment for government securities and retail segment for general transactions.

Analysis of global regulatory frameworks reveals diverse approaches, from China’s restrictive stance to the European Union’s structured regulation through MICA. India’s regulatory framework emphasizes financial inclusion while maintaining cautious oversight of private crypto currencies, implementing a 30% tax on digital asset transfers. The study identifies key challenges including technological literacy, cyber security, and infrastructure development, particularly in rural areas. The successful adoption of digital currency systems requires careful balance between technological innovation and regulatory oversight, while ensuring broad accessibility. This transformation represents not merely a change in transaction methods but a fundamental shift in economic interaction, with implications for monetary policy, financial inclusion, and global trade dynamics.

Keywords: Digital Currency, CBDC, Crypto currency, Financial Technology, Digital Rupee, Regulatory Framework

Introduction

In today’s digital world, many  system operates only in digital mode. The most important aspects of our daily lives have shifted to digital platform from mobile banking and online working in houses  .This digital transformation has made services more accessible and efficient, though it has also created a need for digital literacy and reliable internet connectivity as basic requirements for modern life. Since money is necessary to maintain life in the modern system, India is developing daily in a range of fields and technologies. They have concentrated on developing human capital and have transformed their digital payment the environment, making it one of the most advanced and commonly utilized systems in the world. The success of India’s digital payment creates more efficiently financial system It indicates that technology is developing with end users, and when new payment methods appear, they expand applications case.

Fascinating  evolution of money from ancient times to our digital present. In the former times money is as old as human civilization itself. Our ancestors initially recognized the importance of an organized system of wealth exchange . Coins ringing in wallets and the development  of the digital word were long before. Then the barter system as developed but they have significant limitation, it required a “ double coincidence of want,” meaning both the parties needed to have exactly what other wanted.

 During medieval period witnessed of   transformation  in monetary system  where it includes Chinese invention of paper money during the period of dynasty and the development in Italian  banking city states. After the medieval period the industrial revolution came brought new changes with the international gold standard ,making global trade easier through a unified system of value. The banks are more prominent and new financial institution emerged invention of the telegraph accelerated financial transaction. In the 20^th century witnessed the rise electronic money ,starting with the first credit cards in the 1950 and the development of electronic fund transfer in the  1970s and major important development gold standard in 1971 marked a shift to fully fiat currency system, backed only by government trust.

In the 1990s the digital era there was beginning  with electronic payment systems and online banking, brought the  significant developments. The “cryptocurrency” revolution, which was started by “Bitcoin in 2009”, was made possible by early digital currency investments such as DigiCash. “Blockchain” technology was established as a result, allowing for peer-to-peer, decentralized transactions free from middlemen.

“Central Bank Digital Currencies” (CBDCs) represent the next step in the evolution of traditional institutions as they adjust to the digital era. This shift is being led by nations like Sweden with its e-Krona and China with its Digital Yuan, which might completely change the way we think about money. Money has continuously changed over this entire trip to satisfy society’s demands for ease, security, and efficiency. Every invention, from smartphones to shells, has improved on the one before it, producing ever-more-advanced methods of storing.

INDIA’S   EMERGING ROLE IN GLOBAL  FINANCIAL TECHNOLOGY

In India’s financial revolution has contributed to important financial developments that have allowed us to move forward with our country’s growth over the past few decades and have a bright, inclusive future where all citizens may live for a few years. Most Indians can now properly work toward their goals. To financial services in contrast to the previous ten years India’s financial landscape has improved throughout the course of these decades of stable financial growth, driven by the hard work of creators and technological advancement of technology.[1]

 The introduction of advanced technologies like digital lending, online banking, and peer-to-peer lending it  has been changed the financial landscape by increasing the efficiency of the services being offered. The Financial Technology sector’s dynamic growth not only enables financial inclusion across the country’s most remote corners but also enhances its already existing economic potential. India is quickly becoming a Technology  hub due to factors like improved digital infrastructure, increased digitization, and innovations in the field of startup.

The growth of financial technology in India also been assured by the government intervention  which includes as “ Unified Payments Interface (UPI)”, “Open Network for Digital” Commerce (ONDC) and “Public Tech Platform for Frictionless Credits (PTPFC)”. The developments like in other sectors in the field of AI ( Artificial Intelligence ) and block chain technology. A number of factors have contributed to the rapidly increasing popularity of digital currency, including the need to lower the expenses associated with managing physical cash, the adoption of financial inclusion, faster payments, 24/7 availability, increased settlement system efficiency, and the easier processing of cross-border payments.

e-Rupee, a digital version of Indian Rupee would be a central bank digital currency (CBDC) backed by RBI.[2] The RBI has emerged as a significant player in global financial technology, particularly in the digital payment and regulatory innovation.it experience with large scale digital financial initiatives.  As The Digital Rupee is introduced in India to enhance financial inclusion, providing greater access to formal financial services. It aims to promote efficiency in transactions through faster and more secure digital payment methods, align with the country’s technological advancements, foster a digital-first economy, reduce dependents physical currency and enable better regulatory control over monetary transactions while countering potential illicit activities.[3]

“The Reserve Bank of India” take a steps towards digital currency by introducing the digital by introducing the digital Rupee in late 2022.The implementation was strategically planned in two phases, beginning with the wholesale segment((e₹)on November 1 ,2022,which focused on the settlement of  the secondary market transaction in government securities. The way they follow retail segment ((e₹)launch on December 1 ,2022,which was implemented as a pilot project in selected cities including Mumbai, New Delhi ,Bengaluru and Bhubaneswar.

MAJOR   REGULATORY   FRAME WORLD WIDE

Comprehensive overview of major digital currency regulatory frame works worldwide

United States

• The U.S. announced a new framework in 2022.[4]
• New federal directive established to regulate digital assets and Gave increased authority to existing market regulators (SEC and CFTC), Created Foundation for more systematic manner.
• Digital assets may be classified as securities, commodities, or Property Major focus on preventing money laundering through “Bank Secrecy Act Compliance”. State-level regulation varies (e.g., New York’s Bit License).

China

• Banned crypto currency trading and mining and developing central bank digital currency. The People’s Bank of China (PBOC) has imposed a ban on crypto businesses, citing unauthorized public fundraising.
• In May 2021, it outlawed Bitcoin mining, leading to many miners moving to more crypto-friendly regions. By September 2021, it imposed a full ban on cryptocurreny, citing unregulated financial activities.
• These measures aim to mitigate risks associated with virtual currency speculation and trading. Strict control over digital payment systems.

Canada

• While it actively regulates it, Canada does not accept cryptocurrency as legal cash. It was the first nation to authorize an exchange-traded fund (ETF) for Bitcoin that was listed on the stock exchange of Toronto.
• Provincial regulators, which are controlled by the CSA and IIROC, require cryptocurrency exchanges and dealers to register.
• Investment companies in cryptocurrency are regarded as MSBs and are required to register with FINTRAC.
• In Canada, cryptocurrencies are subject to the same taxes as conventional commodities.

EUROPEAN UNION

• The majority of the EU allows cryptocurrency, while exchange laws vary between nation to nation. The tax rates on cryptocurrency vary from 0% to 48% in each of the member nations.
• The EU’s 5AMLD and 6AMLD reinforce reporting requirements and KYC/CFT duties. In an effort to improve industry regulation and consumer rights, the Markets in Crypto-Assets Regulation (the MICA) was suggested in 2020.
• MICA , which is which goes into force in July 2023, mandates that specific crypto service providers get licenses and assists in tracking illegal activity while protecting users.

India

• India has neither regulated nor regulated the usage of cryptocurrencies, it is unlikely to regulate or completely ban them.
• It was not put to a vote, a bill to ban private digital currencies is in circulation. Investments and transactions involving cryptocurrency are subject to 30% tax and 1% at-source tax deduction.
• The Finance Bill of 2022 declared virtual digital assets to be property and created tax rules for their collection.

Cryptocurrency Regulation In India – A Brief History[5]

Since 2008, cryptocurrencies have been becoming popular in India, with initial transactions occurring in January 2009. The surge in cryptocurrency popularity resulted from the demonetization of high-denomination currency notes in November 2016, prompting the embrace of alternative online banking methods like cryptocurrencies.

“Indian cryptocurrency exchanges such as Zebpay, Coinsecure, Unocoin, Koinex, Pocket Bits, and Bitxoxo commenced operations between 2012 and 2017. In 2013, the RBI released a statement warning the public of engaging in virtual currencies, such as Bitcoin. The use of cryptocurrencies in India accelerated following the demonetization of high-denomination currency notes in November 2016. Indian bitcoin exchanges began to rapidly acquire users, resulting in an increase in transaction volume across all Indian platforms.”

In October and November 2017, two Public Interest Petitions were submitted to the Supreme Court of India: one by Siddharth Dalmia, advocating for a prohibition on the sale and purchase of cryptocurrencies in India, and another by Dwaipayan Bhowmick, seeking regulation of cryptocurrencies in the country. Both petitions are presently awaiting resolution in the Supreme Court.

In November 2017, the Government of India established a high-level Inter-ministerial Committee chaired by Shri Subhash Chandra Garg, Secretary of the Department of Economic Affairs, Ministry of Finance, which included Shri Ajay Prakash Sawhney (Secretary, Ministry of Electronics and Information Technology), Shri Ajay Tyagi (Chairman, Securities and Exchange Board of India), and Shri B.P. Kanungo (Deputy Governor, Reserve Bank of India). In July 2019, the Committee presented its report advocating for a prohibition on private cryptocurrencies in India.

The RBI circular of April 6, 2018, barred Commercial and Co-operative Banks, Payments Banks, Small Finance Banks, NBFCs, and Payment System Providers from dealing in virtual currencies themselves and instructing them to stop providing services to all companies that deal with virtual currencies. This hampered cryptocurrency exchanges’ economic operations, requiring users who had bought cryptocurrencies on these exchanges to sell their crypto assets and cash out before losing access to banking services.

Faced with this existential threat, numerous exchanges, notably those affiliated to the Internet and Mobile Association of India (IMAI), filed a writ suit before the Supreme Court on May 15, 2018. If the Supreme Court agrees with the petitioners’ claims, cryptocurrency exchanges might commence operations in India, potentially revitalizing the bitcoin ecosystem and making cryptocurrencies a legitimate investment alternative.

India’s Current Regulatory Framework

In India, cryptocurrency occupies a peculiar place, both fascinating and mystifying. it has captivated the interest of many individuals and corporations. Cryptocurrency is, at its foundation, a digital medium of exchange. However, unlike traditional fiat currencies issued by central banks like the RBI, it runs on a decentralized blockchain system. This network distributes, verifies, and secures transactions without a central authority. The name “cryptocurrency” originates from the encryption applied to protect transactions. Complex algorithms encrypt data, assuring its immutability and defending against fraud.

Legal Status of Cryptocurrency in India[6]

India’s crypto landscape is a complex one, with cryptocurrencies not recognized as legal tender but not illegal. The government has implemented a 30% crypto tax on income from digital asset transfers and a 1% TDS on transactions exceeding INR 50,000 annually. The Digital Crypto Bill, introduced in Lok Sabha, could potentially ban private cryptocurrencies, further intensifying the uncertainty. Despite the lack of clear legal status, the Indian crypto landscape is thriving with local exchanges, blockchain startups, and enthusiasts. However, caution is needed due to the volatility of crypto markets and the potential for security breaches and scams. The RBI’s cautious stance and initiatives like the Web3 Sandbox in Telangana reflect the internal struggle between innovation and mitigating risks. Seeking professional financial advice is highly recommended before engaging in crypto-related activities.

Central Bank Digital Currency (CBDC)

Central Bank Digital Currency (CBDC) also known as “Digital Rupee” or “e₹” is defined by RBI as a legal tender issued by a central bank in a digital form. It is the same as a sovereign currency and is exchangeable one-to-one at par (1:1) with existing currency. Digital rupee (e₹) will offer properties of physical cash like trust, safety and settlement finality with atomicity (i.e. rapid settlement of transactions) in digital mode. Digital rupee (e₹) represents a direct claim on the central bank. It can be used to carry out transactions or hold value digitally, analogous to the manner in which currency notes are used in physical form.[7]

• Implementation Strategy

The introduction of the Digital Rupee, a Central Bank Digital Currency (CBDC) initiated by the Reserve Bank of India (RBI), necessitates a multifaceted approach to implementation. The initial phase involves extensive research and collaboration with financial institutions, technology firms, and governmental bodies. Pilot programs will be conducted to test the currency in controlled environments, allowing for adjustments based on real-world feedback.

Key to implementation is establishing a regulatory framework that ensures the Digital Rupee operates within existing legislative boundaries, while also adapting to new digital paradigms. Public awareness campaigns will be critical in informing the populace about the benefits and usage of the Digital Rupee, targeting both urban and rural areas to ensure widespread acceptance.

• Technical Infrastructure

The technical backbone of the Digital Rupee integrates blockchain technology to ensure transaction transparency, security, and immutability. A hybrid model combining centralized and decentralized elements might be adopted; the centralized system allows for regulatory oversight and control, while the decentralized aspect can foster resilience and technological innovation.

A secure and scalable distributed ledger technology (DLT) platform will be essential for handling large volumes of transactions efficiently. Emphasis will be placed on developing robust security protocols to safeguard against cyber threats and data breaches. The infrastructure will also require compatibility with existing digital payment systems, ensuring seamless integration and interoperability.

• Adoption Metrics and Challenges

To measure the adoption of the Digital Rupee, several metrics will be monitored: transaction volume, user base growth, merchant acceptance rates, and the velocity of money within the digital ecosystem. These indicators will provide insight into the efficacy of the implementation strategy and highlight areas for improvement.

Challenges to adoption are multifaceted. Technological literacy remains a significant hurdle, especially in rural regions where digital infrastructure is less developed. Trust in digital financial systems must be cultivated, addressing concerns about privacy and data security. Moreover, the transition from physical to digital currency will necessitate incentives for both consumers and merchants to adopt the Digital Rupee over traditional currencies or existing digital payment options.

Private Crypto currency Regulations

 Taxation Policies

Taxation policies play a critical role in the regulation of private cryptocurrencies. Governments around the world have begun to address the taxable nature of virtual currencies, ensuring they generate revenue from this rapidly evolving market. Private cryptocurrencies are often subject to capital gains tax whenever they are exchanged, sold, or used for purchases. This taxability means that investors must maintain detailed records of their transactions to calculate the appropriate capital gains or losses. Failure to comply with these requirements can result in severe penalties, making it essential for cryptocurrency holders to work with tax professionals who understand the intricacies of digital currency taxation.[8]

Trading Restrictions

Trading restrictions are another critical aspect of cryptocurrency regulation. Many countries impose limitations on the trading of these digital assets to combat illegal activities such as money laundering, terrorism financing, and fraud. In some jurisdictions, crypto exchanges must obtain a license to operate legally, ensuring they adhere to stringent security protocols and transparency measures. Additionally, nations like China have gone as far as banning cryptocurrency trading completely to maintain control over monetary policy and economic stability. These trading restrictions can significantly impact the liquidity and adoption rates of private cryptocurrencies, underscoring the importance of clear and enforceable regulations to protect investors and financial markets.

Compliance Requirements

Compliance requirements are essential in the realm of private cryptocurrency regulations to ensure that all actors within the ecosystem engage in lawful and ethical practices. Compliance often involves adhering to Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) regulations. For cryptocurrency exchanges and service providers, this means implementing robust Know Your Customer (KYC) protocols to verify the identities of their users. This process helps prevent the misuse of digital currencies for illegal activities by creating a transparent and traceable network of transactions. Furthermore, regulatory bodies worldwide may require periodic audits and disclosures from crypto-related businesses to uphold market integrity and consumer trust. The evolving nature of these compliance requirements necessitates ongoing vigilance and adaptability from all stakeholders involved in the cryptocurrency market.

Impact Analysis

Economic Implications

• Domestic Financial Markets

The transformation of financial systems through digitalization has fundamentally reshaped domestic markets. Traditional banking institutions are witnessing unprecedented changes in their operational models, with digital innovations dramatically improving market efficiency and reducing costs. Transaction processing has become near-instantaneous and automated, forcing banks to adapt their business strategies. Monetary policy mechanisms are evolving rapidly, with central banks developing new tools and approaches to manage money supply and interest rates in this digital age.

• International Trade Dynamics

Digital transformation has revolutionized cross-border transactions, creating a more interconnected global marketplace. Companies engaged in international trade now benefit from streamlined processes, reduced foreign exchange costs, and more efficient trade finance solutions. Small and medium enterprises have particularly benefited, as traditional barriers to entry have significantly decreased. The evolution of global supply chain financing has opened new avenues for businesses to optimize operations and improve working capital management.

• Currency Stability and Monetary Control

The relationship between traditional fiat currencies and digital alternatives has become a critical focus for financial institutions and policymakers. Central banks worldwide are addressing complex questions of currency sovereignty and exchange rate stability. This is particularly crucial for developing economies, where the benefits of digital financial innovation must be balanced against the risks of dollarization and monetary control challenges.

Technological Innovation

• Fintech Sector Development

The financial technology landscape has experienced explosive growth, introducing revolutionary business models and innovative products. Investment in fintech startups has reached unprecedented levels, driving the development of sophisticated solutions powered by artificial intelligence and machine learning. Traditional financial institutions are either forming strategic partnerships or competing with these new entrants, creating a more dynamic and competitive market environment.

• Blockchain and Distributed Ledger Technologies

Blockchain technology has emerged as a fundamental catalyst for change in financial services. The implementation of distributed ledger technologies and smart contracts has created new paradigms for conducting transactions and managing assets. While scalability and energy consumption remain significant challenges, the technology continues to evolve, necessitating careful consideration of security protocols and regulatory frameworks.

• Digital Payment Infrastructure

The payment landscape has undergone radical transformation through the development of sophisticated payment gateways and mobile solutions. Integration of new systems with existing payment networks has created a more efficient financial ecosystem, though concerns about interoperability and security persist. The evolution of point-of-sale technology and digital wallets continues to reshape how consumers and businesses conduct transactions.

Social Implications

• Financial Inclusion

Digital transformation has significantly improved access to financial services for previously underserved populations. Mobile and digital solutions have brought banking services to rural communities, helping reduce gender disparities in financial access. Remittance costs have decreased substantially, providing direct economic benefits to families dependent on international money transfers. This democratization of financial services represents a significant step toward reducing economic inequality.

• Digital Literacy and Education

The digitalization of financial services has highlighted the crucial need for digital literacy and education. Comprehensive training programs and public awareness campaigns have become essential as financial services become increasingly technology-dependent. The employment landscape in the financial sector continues to evolve, with traditional roles being redefined and new positions emerging to meet the demands of digital finance.

• Consumer Protection and Security

As financial services become more digitized, consumer protection has emerged as a paramount concern. Privacy issues, data security, and fraud prevention require robust regulatory frameworks and effective dispute resolution mechanisms. The development of comprehensive consumer protection policies has become essential for maintaining public trust in digital financial systems and ensuring sustainable growth of the sector.

CONCLUSION

The evolution of currency from ancient barter systems to modern digital solutions marks a pivotal transformation in human financial history, with profound implications for the future of global commerce and economic systems. As we analyze this transformation, it becomes evident that the shift towards digital currency systems is not just inevitable but is actively reshaping the financial landscape worldwide. Different nations have adopted varying approaches to this digital revolution, with some embracing it wholeheartedly while others maintain a more cautious stance. China’s restrictive approach contrasts sharply with the more balanced strategies of many developed nations, while India has emerged as a significant player with its innovative yet measured approach to digital currency adoption.

India’s position in this global transition is particularly noteworthy, characterized by the successful phased implementation of the Digital Rupee (e₹) and the development of robust digital payment infrastructure like UPI. The country’s strategic focus on combining financial inclusion with technological innovation, while maintaining a cautious approach to cryptocurrency regulation, has created a unique model for developing nations. This balanced approach has enabled India to harness the benefits of digital currency while minimizing potential risks and ensuring broader financial inclusion.

The impact of this digital transformation extends far beyond mere technological change, touching every aspect of the economic and social fabric. In the economic sphere, it has led to enhanced efficiency in domestic financial markets, reduced transaction costs in international trade, and improved monetary control mechanisms. The technological landscape has witnessed accelerated growth in the fintech sector, advanced adoption of blockchain technology, and the modernization of payment infrastructure, complemented by the integration of artificial intelligence and other emerging technologies.

The social implications of this transformation are equally significant, with digital currencies serving as a powerful tool for financial inclusion. Previously underserved populations now have greater access to financial services, though this has highlighted the critical need for enhanced digital literacy and robust consumer protection measures. The shift has also contributed to reducing gender and regional disparities in financial access, creating a more equitable financial ecosystem.

Looking ahead, the future of digital currency, both in India and globally, appears promising but requires careful navigation of various challenges. Success will depend on the continued evolution of regulatory frameworks to address emerging challenges, maintaining a delicate balance between innovation and security, and ensuring sustainable technological development. Critical to this success will be the emphasis on public education and awareness, enabling broader participation in the digital economy. The ultimate achievement of this digital transformation will rely on the collaborative efforts of governments, financial institutions, and technology providers in creating a secure, efficient, and inclusive financial ecosystem that serves the needs of all participants in the global economy.

This comprehensive transformation represents not just a change in how we conduct financial transactions, but a fundamental shift in our approach to money, value, and economic interaction. As we move forward, the lessons learned from early adoption and implementation will be crucial in shaping a financial future that is more accessible, efficient, and equitable for all.

[1] (N.d.). Pwc .In. Retrieved October 23, 2024, from https://www.pwc.in/assets/pdfs/industries/powering-indias-usd-5-trillion-economy-by-fostering-innovations.pdf

[2] GLOBAL LEGAL INSIGHTS: Litigation & dispute resolution. (2023).

[3] (N.d.-b). Bankofbaroda.In. Retrieved October 23, 2024, from https://www.bankofbaroda.in/banking-mantra/digital/articles/what-is-digital-rupee

[4] George, K. (2021, September 21). Cryptocurrency regulations around the world. Investopedia. https://www.investopedia.com/cryptocurrency-regulations-around-the-world-5202122

[5] “Cryptocurrency Regulation in India – A Brief History — The Centre for Internet and Society” <https://cis-india.org/internet-governance/blog/cryptocurrency-regulation-in-india-2013-a-brief-history>

[6] Omkar, “Cryptocurrency Regulations in India [Crypto in India]” (KYC Hub, October 29, 2024) <https://www.kychub.com/blog/cryptocurrency-regulations-in-india/>

[7] “Digital Rupee – Central Bank Digital Currency (CBDC) – Axis Bank” <https://www.axisbank.com/digital-rupee-cbdc/#:~:text=Currency%20(CBDC)%3F-,Central%20Bank%20Digital%20Currency%20(CBDC)%20also%20known%20as%20%E2%80%9CDigital,claim%20on%20the%20central%20bank.>

[8] Surana E, “Taxation On Cryptocurrency: Guide To Crypto Taxes In India 2024” (Cleartax, July 9, 2024) <https://cleartax.in/s/cryptocurrency-taxation-guide>