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Internet based technology has turned out to be an agent of disruption which brought in overwhelming changes across economy, society and industry. New business models have been created through application of GPS, AI, IOT, Blockchain, which has not only created enormous wealth and value by disrupting existing practices and building cheaper, more accurate and efficient systems but also ushered in customer delight. It promised to vastly reduce operational and logistical costs by removing barriers and middlemen.

The latest disruption, blockchain, and with it, the rise of cryptocurrencies showed the way ahead, by creating decentralized computer networks capable of holding value, contracts, agreements, transactions in an encrypted manner. And as a first-hand initiative Bitcoin, a digital currency or cryptocurrency, founded on the block chain technology which has conspicuously gained a place amongst various options of investment. Several other cryptocurrencies made appearance in the market over the last few years, with Bitcoin leading the pack with a total market value of $231 billion accounting for 36% of the total value of all cryptocurrencies. The entire crypto currency market hit its peak value at about $700 billion in January 2018. Ethereum (13% market share) and Bitcoin cash (8%) are just two other major cryptocurrencies that are being traded today.

Bitcoin has been largely seen as an investment product since its introduction in 2009. It has had one of the most volatile trading histories. Apart from daily volatility, in which double-digit inclines and declines of its price are not uncommon, they have had to contend with numerous problems plaguing its ecosystem. In fact, the currency being not minted and controlled by any central bank and just mined by some complex computer algorithms without having a physical fungibility, has created a mist around it

2013 proved to be a decisive year for Bitcoin’s price. The digital currency began the year trading at $13.40 and underwent two price bubbles in the same year. The first of these occurred when the price shot up to $220 by the beginning of April 2013 followed by an equally rapid depletion in its price, and the cryptocurrency was changing hands at $70 by mid-April. Another rally and subsequent crash occurred towards the end of that year. In early October, the cryptocurrency was trading at $123.20. By December, it had spiked to $1,156.10. But it fell to around $760 three days later. Many investors in India, who joined the bandwagon in the hope of making a windfall gain, ruthlessly suffered loss because of their ignorance about the pitfalls. After lot of deliberations, the RBI think tank sensed that Virtual Currency (VC) and its holding and trading were not-so-transparent and finally, they came up a with press release on December 24 2013.

“The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.” Amongst several other non-conformities, it was stated “There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.” 

In 2017 another price bubble came.  The cryptocurrency was hovering around the $1,000 price range at the beginning of that year. After a period of brief decline in the first two months, the price charted a remarkable ascent from $975.70 on March 25 to $20,089 on Dec. 17. RBI came up with a note of caution in February 2017 which read, “The Reserve Bank of India advises that it has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.”

With demonetisation, cashless payment modes were already taking shape. Penetration of digital payments in the form of credit / debit card, UPI, online wallets, electronic fund transfer etc have gained ground since 2016. Pandemic, which itself may be called a disruptor, has further evolutionised the payment system to a very large extent. It seemed to have completed that cycle and put a big push towards digital payments. At this juncture, adoption of crypto currency as a legal tender is also being considered by many countries with El Salvador having done it on September 7. The International Monetary Fund opined that digital money, such as crypto currencies have the potential to provide cheaper and faster payments but “making them equivalent to a national currency is an inadvisable shortcut.”

RBI has decided to walk a middle path and introduce Central Bank Digital Currency (CBDC), which is expected to be rolled out by December 2021. CBDC neither replaces the physical tender nor replicates a crypto. In simple terms, this will mean that Rs.100 held digitally will be `100 held in cash.

T Rabi Sankar, Deputy Governor, Reserve Bank of India said in July 2021, “A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.”  

He also mentioned, “While interest in CBDCs is near universal now, very few countries have reached even the pilot stage of launching their CBDCs. A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. Why this sudden interest? The adoption of CBDC has been justified for the following reasons -

i.Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency (like Sweden)

ii. Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US)

iii. Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.”

To conclude, whether the Indian economy toes the threshold of $5 trillion mark by 2024-25, is an arguable notion but adoption of digital payment and a CBDC gaining headwinds looks absolutely imminent. 

Author works for Peerless Financial Services Ltd. in Legal & Risk Management.  Views expressed are his personal