The Reserve Bank of India (RBI) will issue a digital rupee using blockchain and other technologies in 2022-23, Finance Minister Nirmala Sitharaman said.

This will make India one of the world’s major economies to have a central bank digital currency (CBDC), much like China which is testing a digital yuan.

“The introduction of a CBDC will give a big boost to the digital economy,” Sitharaman said in her budget speech. “Digital currency will also lead to a more efficient and cheaper currency management system.”

The CBDC is a digital form of fiat currency which can be transacted using wallets backed by blockchain. It will be regulated by the central bank. 

"The Union Budget made way for digital rupee, which is a monumental step in driving the next phase of growth in the digitisation of financial services and payments in India and will bring efficiency of transactions. Clearly, the success of digital payments is prompting the next milestone of this journey. Through the massive adoption of Paytm, QR code, and digital banking, we have seen that customers are ready for mainstream digital money. I'm excited that India will be at the forefront of new financial services that can act as a big gamechanger in lowering the cost of banking, which in turn will drive financial inclusion," said Paytm CMD and CEO Vijay Shekhar Sharma.

CBDC is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status. It enables the user to conduct both domestic and cross-border transactions, which do not require a third party or a bank.

The government also plans to tax any income from the transfer. of digital assets .at the rate of 30%. This will impact gains from cryptocurrencies and NFTs (non-fungible tokens) as well, which have seen a boom in India in recent times. 

 “No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income,” Sitharaman said.

In order to capture the transaction details, the government has also provided for TDS on payment made while transferring of virtual digital asset at the rate of 1% of such consideration, above a monetary threshold. Gifting of virtual digital asset is also proposed to be taxed in the hands of the recipient.

“30% tax on income from virtual digital assets, while high, is a positive step as it legitimises crypto and hints at an optimistic sentiment towards further acceptance of crypto and NFTs across stakeholders in the country. The government has come a long way in its stance towards crypto from last February to today and we are confident that this will herald a new era of growth and innovation for India in a Web 3.0 world,” said ZebPay CEO Avinash Shekhar. 

The RBI in October 2021 received the nod for an amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form.   CBDC has the potential to provide significant benefits, such as reduced dependency on cash.

In fact, the RBI has already made progress in launching the new digital currency.

"There are two areas of CBDC --wholesale and retail --where the RBI is working on. Ä lot of work has been done on the wholesale side. Some more work is required on the retail front. Whichever gets readied first, we will release it for pilots," RBI Deputy Governor T Rabi Sankar had said, after the credit policy on December 8. 

According to the central bank, the CBDC will have like lesser dependency on cash, much higher seigniorage (no printing of notes required) due to lower transaction costs, and reduced settlement risk for banks. 

Digital currency will be a legal currency issued by the RBI in a digital form. It will be backed by the government with seignorage accruing to the sovereign.  

"The main concern comes from the angle of cyber security and the possibility of digital frauds. So, we have to be very careful about that just as a few years ago we had a major concern was on fake Indian currency notes. Similar things can also happen when you are launching CBDC," RBI Governor Shaktikanta Das had earlier said.

The government had received a proposal from the RBI in October 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form. RBI has been examining use cases and working out a phased implementation strategy for introduction of CBDC with little or no disruption.

“CBDC is likely to have an impact on banks, but the implications of the same will have to be thought through further”, HDFC Bank chief economist Abheek Barua said.

The bill said that the digital currency will create a facilitative framework for creation of the official digital currency to be issued by the RBI. 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 said.

“The launch of digital currency by RBI is both encouraging and critical in empowering the digital native youth to take a transformational leap from the conventional currency tools. We have witnessed an increasing use of blockchain technology to simplify and secure the consumer’s journey, and this push was required to encourage innovation in this domain. Fintechs and startups must help stakeholders establish connections with remote locations and provide value-added services to the underserved and unbanked segments,”said Cashfree Payments CEO & co-founder Akash Sinha.