Swapping Bitcoin for the Rupee: India to ban private cryptocurrencies and launch its own

December 8, 2021

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2 min read

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What's going on here?

The Indian government has unveiled plans to ban private cryptocurrencies and launch its own digital currency.

What does this mean?

On Tuesday 23 November 2021, the Indian government announced its Bill to ban cryptocurrency and release its own digital currency through the Reserve Bank of India. This is because the Bank believes cryptocurrencies pose serious risks to financial and macroeconomic stability, which refers to national-level economic factors such as interest rates and growth. Regulation was first proposed in 2019 in the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, which sought to ban cryptocurrency outright. The latest announcement is therefore more liberal; there will be exceptions for activities “to promote the underlying technology of cryptocurrency and its uses”. However, it is not yet clear whether this includes the specific use of blockchain technology in finance or simply a more general application.

What's the big picture effect?

The Indian government’s proposals echo China’s decision in September 2021 to make all cryptocurrency transactions illegal – a big step up from the previous ban on banks handling them. This caused Bitcoin to instantly lose 8% in value, falling to $41,000. Whilst not as severe, India’s proposals also caused a run on Bitcoin, whose price fell by 2.7% to $56,171. India is also mirroring China’s plans to digitise its main currency, the yuan. Digitisation will see the Chinese yuan and Indian rupee both become more formidable opponents to the US dollar, which was used for 88% of global trade in 2019. Given China’s larger role in global supply chains and debt financing (for example, the Belt and Road Initiative), it will see more benefit from digitising the yuan than India will from digitising the rupee.

Governments around the world are increasing their ability to regulate cryptocurrency. As its value and use grows, it can pose more of a threat to central government monetary policy and help to liberalize financial systems. One reason for this is that cryptocurrencies are very unstable. For example, Bitcoin’s value fell by 30% in just one day in May 2021. In contrast, the largest single-day loss in the Great British Pound since it became a floating currency (meaning its value is not ‘pegged’ to other currencies like the US dollar or commodities like gold) in the 1970s is only 8%, recorded in June 2016. Its volatility makes it unattractive for use as an official currency.

An increase in government oversight contradicts the original aims of some cryptocurrencies. From its inception in 2009, Bitcoin has been designed and marketed as decentralised and independent from global banking. Because of this independence, governments currently face substantial problems in regulating cryptocurrencies. For example, there are differences in production and circulation – cryptocurrencies are mined through computers solving problems, making the total amount in circulation imposible for governments to regulate unlike traditional currencies which are produced in physical factories called mints. Despite these challenges, governments are increasingly regulating because they believe the risks are too dangerous.

The Indian government believes such a ban will protect its economy from volatility and reduce competition for its future digitised rupee. Being one of the first digitised official currencies, the rupee may gain more prominence in global finance and trade. However, it is unlikely to out-compete the digitised yuan.

Report written by Phoebe Turner

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