Virtual Currency in the current Indian legal regime

CBDC’s Viability in India

CBDC is a digital form of currency backed by a central bank that is different from balance in traditional reserve or settlement accounts,[19] which can serve as a medium of exchange, and store value, thereby making it a digital form of fiat money. The key difference between other VCs and CBDCs is that the CBDCs are backed by the sovereign or the central bank, and are recognised as legal tender.

CBDCs offers safer and faster payment settlement, more manageable & cheaper cross border transactions, and higher financial stability, among other advantages.[20]The functionality of CBDC is easy to confuse with current e-payment options, like Paytm and UPI, but the significant difference is that these e-payment options need an aggregator to transfer the payment; whereas CBDC does not require any such intermediary.

Though CBDCs will enable faster payments without intermediaries and make payments cost-effective; they cannot be regarded as Virtual Currency in its true spirit. Introduction of CBDCs, as a substitute to private VCs depicting them as a safer and secure form of Digital currency, defeats the very purpose for which VCs were introduced.

VCs were introduced as a decentralised substitute to traditional currency. Countering issues arose when central agencies debased the currency.[21] Since private VCs are not owned or issued by anyone, they can be freely transacted. In contrast, CBDC would require the sanction of authorities for transactions and would be regulated as well.

For all the good of CBDCs, the users have to part away with their privacy, which is ensured in Cash transactions. Since data is centrally stored and the central bank can monitor each transaction, there lies a possibility that the central bank could share this information with other government agencies for various purposes.[22] In the worst possible scenario, CBDCs can be used as a surveillance mechanism to track people's spending trends.[23] Moreover, the same financial information can be used to curb dissent against the government,[24] as freezing accounts and stopping payments becomes more manageable in an online setup than in cash transactions.

Anonymity and the sovereign guarantee of CBDC transactions would offer liquidity and anonymity of cash, but without the cash's portability limits. Therefore, the Central Bank's dilemma would be whether to ensure people's privacy or to keep a check on transactions that may be inconsistent with Anti Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations. If CBDC allows privacy and anonymity, it will make it easier for the user to avoid AML regulations.[25] On the other hand, if the government chooses to keep a check on illegal transactions, it will put others' privacy into peril.

In India, Financial information is fundamentally sensitive and is considered the private information of an individual.[26] Moreover, the right to privacy emerges from the fundamental right to life. In order to take away a CBDC users' privacy, Central Bank would need a just, fair, and reasonable law. Furthermore, the Supreme Court in the Aadhar Case[27] observed, that the state must put a robust regime that ensures the fulfilment of a three-fold requirement of law. The three-fold requirement of law ensures a reasonable aim employing proportional means to achieve the object sought. It also requires domestic law to afford adequate guarantees that ensure personal data is efficiently protected from misuse and abuse.

This compromise on the part of the users with their privacy has both, pros and cons. On the negative side, they may be subject to surveillance, where their spending habits and trends may be recorded; whilst on the other hand, they may be safeguarded from various scams.

Like everything on the internet, CBDC too would be prone to internet attacks. These attacks can take away the user’s CBDC, or corrupt the system, thereby deleting CBDC. Further risks include the process delaying,[28] or transfer of CBDC to a mock destination causing loss to the legitimate recipient. Moreover, the frequent hacking of Twitter accounts of famous personalities and duping of people by promising double returns on bitcoins sent on a particular wallet address,[29] the risk associated is critical. The major hurdle to trace such transactions is the anonymous and immutable nature of the bitcoin. This contention of being scammed gets resolved to some extent with the advent of CBDC. CBDC is guaranteed by a sovereign and is centrally recorded. Therefore every transaction gets recorded and thus, the chances of un-traceability decrease, thereby making CBDC safer than other private VCs.

In most of the countries, CBDCs are only in a research state, and in a few countries like China, CBDCs are implemented as a pilot project.[30] In countries like Venezuela,[31] and Marshall Islands,[32] have already made CBDC operational. Ecuador, on the other hand, decommissioned their CBDC in 2018 which was released in 2014.[33] Major economies, like US, Russia, UK, China, etc. are considering CBDC as an alternative to cash for retail use.[34] Furthermore, a bill to recognize cryptocurrency as a property for purpose of its taxation is pending in the Russian Parliament.[35] One significant difference between the India and the countries considering CBDC as an alternative to Cash is the Data Protection Regimes established. While in US, UK, China, and Russia there is some or other form of data protection, India lacks a similar strong data protection regime. The only way to check data sharing is either through the Information Technology Act, and subsequent rules therein, or safeguarding privacy by invoking writ jurisdiction of High Courts or the Supreme Court for violation of the fundamental right to privacy, in extreme cases.