State-Issued Cryptocurrency- A Boon or a Bane?

by Unnat Akhouri
We have elected to put our money and faith in a mathematical framework that is free from politics and human error’ Tyler Winklevoss


Introduced in the year 1991 by Stuart Haber and W Scott Stornetta as a chain of information secured by cryptography, blockchain gained prominence due to the numerous benefits associated with it. The advent of such a revolutionary technology paved the path for several other innovations, that are rooted in the concept of the decentralized structure of blockchain. This act of exploring other applications of blockchain introduced the concept of cryptocurrency: a virtual currency backed by a decentralized network. These virtual currencies were being issued by private players in the economy and therefore had a substantial percentage of volatility associated. However, this innovative technological advancement has not been readily accepted by various governments across the globe owing to the volatility and the risks including illegal funding to prohibited activities and money laundering, mainly as a result of the unregulated crypto market.

With the same repulsive attitude but convinced by the merits of a digital currency (backed by cryptography), several nations are now on their way to introduce a State issued cryptocurrency. The same has been proposed by the Indian government under Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. Through this bill, the Indian government aims to introduce its own centrally issued cryptocurrency and ban all the private cryptocurrencies as well. Therefore, this article aims to reduce these complex terms for a better understanding, and critically analyse the recent developments.

In a layman’s language, Central Bank Digital Currency (CBDC) is a simple digital currency issued by the central authority, on a blockchain network. A couple of nations including but not limited to Ecuador, Senegal and Venezuela have already issued their regulated cryptocurrency. Although Ecuador has failed in its attempt to mainstream the said currency and finally disposed of it, the concept of state-issued crypto is now being adopted by various other nations including Iran and India as well.

Scrutinizing the concept of a state-issued cryptocurrency

Governments across the globe are attracted by the wide range of benefits cryptocurrency has to offer. Some of the major highlights are-

  1.  The transactions executed on a blockchain network are decentralized and immutable (that is, the records cannot be altered) in nature. Therefore, the utilization of the same in the entire cycle of issuing and using the currency would enable in reducing the scope for funding illegal activities and evading taxes.
  2. The mainstreaming of cryptocurrency would provide for a more convenient mode of transactions, as the transactions would be completed in a fraction of time on a completely online basis. Therefore, it will end up in increasing the liquidity due to the increased flow of money in the market.
  3. International payments would become easier and cost-effective by this, as the complicated structure of money transfer would be simplified by the decentralized network. However, it will require a unified currency system across the globe.
  4. The rate of financial inclusion would rise significantly with this, owing to the convenient procedure for making payments. The need for banks and financial institutions in remote areas would no longer be a persisting issue, as all the transfers could be made independently.

However, there are certain challenges in introducing a state-issued cryptocurrency, which also resulted in compelling Ecuador to take down the new form of currency. As stated by the officials, the centralized cryptocurrency was not able to gather a large number of users, due to some specific reasons. There are certain other obstacles and conflicts as well, in the path towards adopting the centrally issued cryptocurrency. One of the major obstacles lies in the assumption by the authorities that a large number of citizens are keen to adopt these technological advancements in the financial system and hence this will increase financial inclusion. However, several sources confirm that even after the widespread popularity and simplified procedure, the ratio of people using UPI apps is still not encouraging, in India.

The criticism faced by CBDCis mainly related to the contention of widespread adoption. With the increased technical intricacies, the aforementioned crypto does not assure a high rate of adoption. Furthermore, the considerable number of people involved in the transactions of private cryptocurrency does so for investment purposes, guaranteed by the sense of financial freedom and volatility of the coins. It has been quoted now and then by people that: If issued by the central government, it will be nothing better than a normal internet banking transaction, recorded on a blockchain network.

However, they fail to acknowledge the fact that the transactions being recorded on a blockchain network will go on eliminating the money-laundering activities. Also. This being on a blockchain, the cross-border transfers will be considerably easier.

Will this remove all other types of currencies?

When we talk about the reduced economic frauds, the argument does not take into account the alternative options available, rather than the centralized cryptocurrency. Since removing all other forms of currencies is not possible by any means, the circulation of paper-based and other digitized processes to exchange money continue to sustain the white-collar crimes. To prevent this, stringent regulations such as a particular cap on using paper money can be enforced. This will also increase the complication and thereby making the financial system distant from the user and a burden for the regulators.

Conflict between state and private crypto

The main conflict arises when there is a debate between state and private crypto issuers. There have been two conflicting positions of nations introducing the state-issued cryptocurrency, that is-

  1. Banning all other private players while issuing a centralized crypto
  2. Allowing the private crypto assets, meanwhile introducing a regulatory framework for them.

Indian regulators have strongly expressed their opinion of banning private players from the economic market. However, this infringes the financial freedom bestowed to all the citizens, as argued by the supporters of private cryptocurrencies. Understanding the scenario in a simpler level, imagine people turning towards the concept of ‘barter system’ again as a means to buy goods. In this case, the government does not have the authority to stop people from doing so. Drawing an analogy, private cryptocurrencies are nothing but means adopted by the citizens. Rather than putting ban on it, a comprehensive framework shall be made to keep a check on the shortcomings of the said innovation.

Having said this, it is equally important to acknowledge the fact that the concerns put forth by the regulators are genuine in nature. The high volatility of these assets is something that can disrupt the entire financial market. Additionally, what started of as a tool to curb illicit funding, has today emerged as one of the major concerns when we talk about curbing such acts.

The way ahead

Despite considering the merits of a state-issued cryptocurrency, it is imperative to note that the mainstreaming would require a lot of infrastructural development and stringent regulations. However, is it more practical to explore other alternatives and not restrict the definition of digital currency to the concept of cryptocurrency? Cryptocurrency forms a subset of digital currency, just like other mediums including bank deposits. This has also been substantiated by the IMF report on central banks’ digital currency, which calls for a comprehensive study on other alternatives available as well. In a recent session, SC Garg (former union finance secretary of India) introduced the concept of demitted notes, which will work through a digital wallet supported by a blockchain system. In addition to this, the regulators shall work towards creating a conducive yet regulated environment for the private cryptocurrencies, thereby ensuring a free economic market. The idea behind the term FinTech: Introducing technology in the financial market shall be preserved. The sudden shift from FinTech to TechFin is not highly appreciated: as there are various other intricacies involved with the financial sector, which can lead to catastrophic effects if neglected. All the issues cannot be decided just by taking into account the newer technological advancement. Financial intricacies always precede technology, in the FinTech sphere.

Views are personal.

Image credits: Forbes


Unnat Akhouri is a student at NALSAR University of Law.

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