Crypto a force-multiplier for India’s digital currency rollout
As India creates a CBDC, building on and leveraging off an existing crypto technological stack would be a safe option, especially one that has resisted nation-state attacks by the CCP.
The list of bills has been released for the winter session of Parliament in the world’s most populous democracy. This includes much-needed crypto regulation in India. Surprisingly, description of the crypto bill was verbatim to one introduced early this year, despite monumental developments in the crypto over the same period. These include China’s ban, that ended up benefiting the US, and El Salvador’s successful decision to make Bitcoin official legal tender.
It is important that there should be updates to the bill when taking into consideration new developments of such a magnitude. Furthermore, careful design is warranted with a crypto policy that has wide-ranging implications that go beyond the traditional scope of the Reserve Bank of India (RBI.)
The current bill ties two conjoined policies. First, it seeks to facilitate the introduction of a central bank digital currency (CBDC) to be issued by the RBI, and second, roll out a ban of private crypto in India. This second leg of the bill is to ensure a smooth rollout of CBDC, but could harm the project in practice.
Public comments by officials have suggested the ban would target the payment function of crypto. However, this focus on the payment function is misguided and counterproductive to the primary objective of a successful rupee CBDC rollout, in light of geopolitical risks not well covered in the current crypto policy consultation.
It is important that regulatory and enforcement resources shift from banning payment functions of crypto to enhancing the “unit of account” function of the rupee CBDC. Crypto is quite similar to the internet, in that distinctly different functions can be built on the base layer in response to specific local demands of the people. Payment is not the primary use of crypto in India due to superior existing systems, and hence the current policy direction is to solve a nonexistent problem perceived by the RBI.
The resources and focus of the government led by the globally-known reformist, Prime Minister Narendra Modi should be aimed at mandating and protecting the digital rupee’s “unit of account” function, the seminal foundation of any fiat currency, in India. As fiat currencies around the world shift toward digital forms, and our next generations spend increasingly more time of the day in the digital metaverse, in both of which the Chinese Communist Party (CCP) has a dominating lead, physical borders will become blurred and irrelevant. Given proper policy, India can displace China as the leader in this new financial order.
As such, in the near future, a sovereign’s hold on its own economy can be eroded by a politically driven tech encroachment from an adversary. Imagine children getting used to thinking in CCP’S technologically superior CBDC terms in the metaverse, and inevitably starting to transact the same in real life. This is the existential threat about which RBI needs to establish a counterstrategy, rather than focus on crypto’s payment function. Unlike the digital threat from China, this poses minimum risks to the society.
PM Modi has correctly flagged the digital issue as needing united action by democracies that seek to keep authoritarian domination at bay. Prudence and patience are called for so that democracies issue central bank digital currencies in a practical manner. Ill-prepared issuance of a CBDC would be a national security risk due to obsolescence risks posed by the CCP’S much more advanced version called the Digital Currency Electronic Payment (DCEP). Furthermore, the authoritarian design of the DCEP, such as state surveillance, could be an irresistible temptation for some central banks to replicate. Such would ultimately corrode the founding principles of democracies.
As India creates a CBDC, building on and leveraging off an existing crypto technological stack would be a safe option, especially one that has resisted nation-state attacks by the CCP. However, without the abundant talent, capital, and infrastructure from the Indian private crypto sector, it is unlikely India will be able to design and implement a Ccp-proof CBDC. The best way to attract the needed scarce resources in crypto is to design a well-designed crypto law. Given its experience with the rollout of demonetisation five years ago, RBI needs to ensure that any major policy rollout should be flawless in conception and implementation, rather than put at risk its own credibility as well as that of the democracy that has emerged as the lynchpin of the security structure protecting a free, open and inclusive Indo-pacific.
As Parliament goes into winter session to finalize the crypto bill, careful consideration must be devoted to the interests of India as a whole, with national security being an integral element. RBI’S case should not attempt the impossible but use crypto as a supporting force in building a geopolitically robust CBDC. Smart policy will ensure crypto is not a threat but an asset. This is what the US and top economies in the EU are doing. After all, cryptocurrency is only currency by name but not in practice. By design, currency will always be the domain and the privilege of the central bank, so that crypto behaves in line with a correctly proposed categorization of commodities and securities in India. This is the 21st century and India is a country of very young people. The RBI needs to understand the future before it leaps into masterminding legislation that may ignore the reality of change.
James Lee is a financial ant based in the US and Taiwan.