Are you prepare for digital Indian currency?
The world’s most well-known cryptocurrency, Bitcoin, recently surpassed $54,000. If you had invested Rs 1 lakh in Bitcoin two years ago, you could have earned Rs 14 lakh by now. By comparison, investing the same amount in the stock market index can bring you around Rs 1.4 lakh. Even gold investment has increased by about 50 percent in the last two years. And yes, investing in Bitcoin in India is still not illegal, even if it is not a legal tender.
This is not an investment advice column, nor should you tell a broker where to find it so that you can invest in Bitcoin or any other personal cryptocurrency. The Reserve Bank of India tried in April 2018 to ban investments in cryptocurrencies. Its notification originally stated that you cannot use your bank account, net banking, bank loan or prepaid wallet to invest in Bitcoin. Prior to the ban, the RBI had warned for more than four years about the dangers and fraud involved in cryptocurrency speculation.
Even in those wild years of speculation, there were plenty of stories of Indians investing good money in Bitcoin in the shadow of excessive legitimacy. Just before the 2018 RBI’s ban on cryptocurrencies lockdown, the Supreme Court overturned last year. Originally, the apex court said that the RBI was violating the fundamental right to livelihood, as the ban harmed the business of virtual currency exchangers. The court further said that the RBI failed the proportionality test (meaning its ban was extremely strict) and also failed to show how the bitcoin business is hurting banks and other regulated entities. In fact, since Bitcoin is not a legal tender, it cannot be used to settle debts, and even outside the Fiat currency system, the court asked why the RBI was entering into people’s economic freedom of business. The lawsuit was filed by the Internet and Mobile Association of India against the RBI, probably on behalf of its members, the fintech companies and start-ups, which run virtual currency businesses. The whole order of the Supreme Court is 180 pages long and is worth reading as a great as a technical, primer for the evolution of virtual currency.
A bill has been introduced in Parliament as all this may soon be underway with the aim of making all trade and speculation in private cryptocurrencies illegal. The bill proposes to create a convenient framework for the official digital currency issued only by the RBI.
India is joining the global race. China is already experimenting with cryptocurrencies issued by the central bank. Other countries, including the European Central Bank, are expected to follow suit soon. Many more countries are likely to issue central bank digital currencies in the next three years. Meanwhile, the market value of the influential private cryptocurrency Bitcoin has exceeded $1 trillion. It has only happened 12 years since its inception. Remember, there are about 19 million bitcoins out there and that is already worth $54,000. A new coin has to be laboriously created, or ‘excavated’ and the process is slowing down. Unlike the Fiat currency issued by the central bank – which can be made from thin air and has potential potential limitations in supply – Bitcoin is produced by a decentralized, anonymous network, as evidenced by blockchain cryptography technology.
Bitcoin is gaining widespread acceptance, and even Wikipedia and Microsoft pay for it. The richest man in the world, Tesla founder Elon Musk, invested $ 1.5 billion in Bitcoin. Many private investors think it is safer than gold. JPMorgan analysts believe that the value of Bitcoin could reach $1, 46,46,000 in the long run. Bitcoin and other private cryptocurrencies are out of the control of the central bank and financial authorities. This is one of their interesting features. However this very feature can make monetary policy very difficult or ineffective. And that is why India is considering banning all private cryptocurrencies. Only the official RBI will be valid.
When a central bank issues digital currency, it will have visibility in every transaction that uses digital cash. Monetary policy and rate transitions could be more effective and interest rate cuts could even go into negative territory. With deep negative interest rates, the central bank can penalize private hoardings of digital cash. Similarly, for financial and tax authorities, digital currency is attractive because every transaction is visible and it becomes very difficult to evade taxes. The government can sort out its tax claim, like TDS, instantly and predictably on every transaction. In terms of cost, digital currency makes it easier for micro-target beneficiaries.
The biggest downside to digital currency is the loss of anonymity that paper cash can give you. Since there is a digital trail, the entire transaction history is available at the central bank. Would you feel comfortable with your older brother for every breath you take, every payment you make? Don’t worry, because cash is still king; But the future with digital cash may not be so far away.
