India’s policy towards cryptocurrencies has taken a few swerves. Unlike gold, which has a secure place in Indian hearts and minds, cryptocurrencies are the new kid on the block. As many as 20 million Indians have bought cryptocurrencies and have spent about 400 billion Rupees (around $5.3 billion) on them. The most popular cryptocurrency in India is Bitcoin, which dominates on the global stage too.
But the Indian Parliament, the Lok Sabha, will consider a Bill in the current session that might have a profound impact on cryptocurrencies and also India’s payments systems. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 – would, says the official announcement, “prohibit all private cryptocurrencies in India” but allow “certain exceptions to promote the underlying technology of cryptocurrency and its uses”. What those exceptions might be has yet to be specified.
The Bill will also “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India”. Central Bank Digital Currencies (CBDCs) are a hot topic for central bankers these days, as cryptocurrency developments have pushed them into fast-evolving technology as they try to protect their control over money.
India’s finance minister, Pankaj Chaudhary, says the government has already received a proposal from the Reserve Bank of India (RBI, India’s central bank) to amend the Reserve Bank of India Act 134, to “enhance the scope of the definition of ‘bank note’ to include currency in digital form” and that the RBI has been working on an “implementation strategy” to roll out a CBDC “with little or no disruption”.
There are two strands to this news. The most immediate is that the leading cryptocurrencies fell in value by as much as 20% when this news broke. India is (or was) potentially a huge market for cryptocurrencies, even though only around 50% of the country’s 1.4 billion people can access the internet. A tightening of the screws on India’s crypto market follows the crypto-crackdown earlier this year in China. Having the world’s biggest markets officially reduced cannot be good news for cryptocurrency warriors.
But perhaps the longer-term and more important strand is the clear signal that India is going all-out for a CBDC. The development of a digi-rupee may be slow and its implementation may be cumbersome; but Narendra Modi’s government has nailed its colours to this mast.
How might this affect gold? Indians buy a lot of gold but the country’s gold reserves amount to some half a gram per person; match that against Switzerland, with reserves of some 136 per capita. But most of India’s gold is in private hands – it’s estimated that as much as 25,000 tonnes is privately held by individuals and families. Imported gold is regularly the second most-costly import item (after crude oil) for India.
Why do Indians accumulate gold? The fundamental reason is trust. Since independence in 1947 there have been three official devaluations of the Indian Rupee. In 1947 the exchange rate was $1/INR1; today it’s $1/INR75. Gold for Indians is physically safer, and arguably financially more reliable. The country’s CBDC will be controlled, when it comes, by the government; to become a reliable and universally accepted currency will require considerable trust.
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