Digital Rupee Vs Crypto: Is It A Fight?

On Oct. 8, the Reserve Bank of India (RBI) finally dropped more hints on how it plans to implement its digital currency (or Digital Rupee/e-Rupee), which would in most accounts be equal to the paper currency. But the presence of the Digital Rupee has gotten a new debate going on whether it stands as a taller rival to cryptocurrencies – at least in India.

The introduction of Central Bank Digital Currency (CBDC) is in line with what’s being considered all over the world. In fact, over 100 countries are looking into the matter of launching the digital form of their legal tender. China is ahead of the curve globally in this regard as its currency, the digital yuan, surpassed 100 billion yuan (USD 13.9 billion) in transactions by the end of August, which came from 360 million transactions.

India would be able to achieve China’s scale in CBDC quite swiftly once the rollout is implemented without a doubt as has been proved most recently by the stupendous achievement of the Unified Payments Interface (UPI). Digital Rupee comes with numerous benefits including helping bring about a huge reduction in costs associated with RBI’s physical cash management and efficiency in the settlement system. This explains its appeal.

But do the benefits of the Digital Rupee pit it against cryptocurrencies? “It [Digital Rupee] will be issued by the government of India and will be equivalent to fiat currency, exchangeable into cash at par from the banks. On the contrary, cryptocurrencies are private in nature, have multiple use cases and round the close appreciation or depreciation like any other asset class. So, it is like comparing apples to oranges. Both are fruits but with different nutritional value”, says Dileep Seinberg, founder and CEO, MuffinPay.

Digital Rupee Better Than Crypto?

Transacting with the Digital Rupee as it rolls out would be the same as making payments via paper currency. The only difference is that the transaction would move to the digital medium (mobile phone or laptops/PCs). But the RBI will effectively have insight into every transaction made. This will make transactions secure and risk-free, as it would be guaranteed by the country. Moreover, they will not have any volatility associated with cryptocurrencies such as Bitcoin and Ethereum.

But the notion of digital currencies only gained importance due to the sheer popularity of cryptocurrencies. Digital currencies like the e-Rupee actually derive their inspiration from the fundamental technology of blockchain that is driving crypto. And while the essence of crypto comes from the decentralised nature of finance, the Digital Rupee will adhere to the traditional, regulated means of intermediation and control arrangements. This would essentially challenge the very concept of Web3.

“Due to the underlying blockchain technology, the Digital Rupee will increase efficiency and transparency. It will enable payment systems to be at the fingertips of people 24/7 making cross-border transactions in real-time faster than before. With RBI backing it, there will be a high level of sovereign trust behind it”, explains Edul Patel, co-founder and CEO, Mudrex.

Is Crypto Ban Possible Now?

Crypto has been the quintessential usher and backbone of the Web3 revolution which is supposedly the next iteration of the internet. The interest and retail investments made by citizens into cryptocurrencies have meant that governments globally have had a torrid time pondering over banning the unregulated market of crypto so far. Could this change with the introduction of the Digital Rupee? Could India go the China way by placing a blanket ban on crypto?

China banned crypto in 2021, citing the reasons to be the role of crypto in facilitating financial crimes and posing a risk to the country’s financial system. Indian government’s vocal positioning on the topic is eerily similar to its eastern neighbour. Moreover, the presence of crypto would mean stiff competition for Digital Rupee due to its regulated and monitored nature. People who want privacy in their transactions would want an alternative mode of transaction and crypto could prove to be a valid alternative.

“[..] the tax regulations around crypto gains and TDS for each crypto transaction by the Indian authorities only suggest that these assets are being adopted in our country. It won’t be long before we see their use cases in different technologies around us, making it less likely that there will be a crypto ban”, says Punit Agarwal, founder and CEO, KoinX.

But would the government be that understanding if it sees crypto as a competition and a means for financial crimes?

Mudrex CEO Edul Patel expresses his optimism about the Indian government not opting to go the China route. “It is unlikely that the government will ban crypto after the digital rupee gets a push. As the digital rupee is not decentralised, this might draw people's attention toward cryptocurrencies. So, there are high chances of both the digital rupee and crypto co-existing, catering to various consumer needs”, he says.

A Potential Opportunity In Crypto

Due to the decentralised nature of crypto – despite the ban – transactions in China continue at a hugely muted rate. The miners and crypto entrepreneurs in China have had to shift their bases to other countries to continue thriving. If India decides to change its stance on crypto, it stands a chance to be a host to a lot of companies at the crux of crypto innovation, which could add to the economy.

But 2022 has been a tough year for the industry with crypto values nosediving, platforms filing for bankruptcies, the Directorate of Enforcement (ED) going after Indian crypto platforms and much more. And with the pilot of the Digital Rupee to go online in near future, the crypto industry could have something to worry about.

Another way to look at the introduction of the Digital Rupee would be that it would challenge many private sector players that are driving the digital payments space, which could face substantial challenges if the government chooses to intervene. Meanwhile, from the government’s perspective, they would not want more startups to move away from the Indian subcontinent as has been observed lately.