राष्ट्रीय अकादमी सीमा शुल्क, अप्रत्यक्ष कर एवं नारकोटिक्स

आंचलऱक पररसर, कानपुर

NATIONAL ACADEMY
OF

CUSTOMS, INDIRECT TAXES & NARCOTICS ,

Zonal Campus, Kanpur

Release Date : 03.02.2022 Dispatch : 02/2022

DIGITAL
CURRENCY-
Concept Paper

Disclaimer :: This Note is only for the use of officers of CBIC. It is based on published
sources and is intended to serve as a background aid in understanding the economic
eco system in which taxation regimes operate. Publication, reproduction or circulation
in any form and citation as a source of information is STRICTLY prohibited. For any
legal reference, readers are advised to refer to the official document.
 Digital Currency concept paper

 Hon‟ble Finance Minister, Government of India in her Budget Speech for

FY 2022-23, announced the introduction of „Digital Rupee‟. She
announced that:
„‟Introduction of Central Bank Digital Currency (CBDC) will give a big
boost to digital economy. Digital currency will also lead to a more efficient
and cheaper currency management system. It is, therefore, proposed to
introduce Digital Rupee, using blockchain and other technologies, to be
issued by the Reserve Bank of India starting 2022-23.‟‟
 Generally, we come across two forms of central bank money, namely
physical cash and reserve/settlement accounts. The physical Cash is the cash
we withdraw from ATMs. The Reserve/Settlement accounts are digital in
form but are accessible only to select financial institutions like banks. There
is also another form of money which is digital money created by the
banking system, but this is however not central bank money. Distinct to
these money forms, the CBDC has been defined as „a digital form of central
bank money that is different from balances in traditional reserve or
settlement accounts‟ by The Bank for International Settlements (BIS). The
RBI defines CBDCs as „a legal tender and a central bank liability in digital
form denominated in sovereign currency and appearing on central bank
balance sheet‟; CBDCs are a form of electronic currency that are
exchangeable at par with similarly denominated cash and traditional central
bank deposits. There may different types of CBDCs viz., a token based
„general purpose‟ CBDC that is available primarily for retail transactions but
may also be available for broader use, a token based „wholesale‟ CBDC
whose availability is restricted and used for wholesale payment and
settlement transactions and/or an account based „general purpose‟ CBDC
that is widely accessible. The current two-tier architecture of monetary and
payments system allows private sector entities to issue the currency or
payment instruments like coins which represent their liabilities and then,
back the same with central bank reserves. This system of two tier
architecture may be replicated by introduction of the synthetic CBDC, or
sCBDC. However, European and Federal Bank define CBDCs strictly as a
digital payment instrument, denominated in the national unit of account,
that is a direct liability of the central bank and reject the sCBDCs.
 Central Bank Digital Currencies (CBDCs), have become an important part
of the discussion on digitalisation of economies around the world. In past
few years, there has been massive change in system of payments made
during a transaction. The world is at juncture where the evolution of
money from cowries to precious metals to paper currency has to take next
turn and the digital representations of fiat currencies is on anvil. Central
Banks across the world are examining the feasibility of introducing CBDCs.
In October 2020, The Bahamas became the first country in the world to

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 Digital Currency concept paper

issue a central bank digital currency – the “Sand Dollar” - for retail use. In
April 2021, the Eastern Caribbean Currency Union issued the block-chain
based digital version of the Eastern Caribbean Dollar DCash. Sweden and
China are undertaking pilots of digital versions of their sovereign currency.
India has been examining the issue as well; the Interministerial Committee
in its report submitted to Central Government had recommended to keep
an open mind towards introduction of Indian CBDC.
 Theoretically, the Digital Rupee may be designed as a „Direct CBDC‟, where
the central bank is entirely in charge, from issuance to maintenance of
ledger and compliance with laws, a „Hybrid CBDC‟, where the CBDC
represents a direct claim on the central bank, like cash, and the private
sector would continue to focus on offering customer facing services such as
on-boarding, KYC, execution of payments etc. The central bank would
retain a copy of all retail CBDC holdings and also have both the technical
and legal ability to transfer customers from one payment service provider
(PSP) to another in cases of insolvency or other failures or an
„Intermediated CBDC‟, which is a nuanced version of the hybrid model
where the central bank would not have any access to the retail ledger,
which would be fully retained by the private sector.
 As the issue of CBDC is little international precedence and finality in terms
of structure and technology is ever evolving and more in domain of theory
rather than practice, India will have to design de novo and depend on the
technological prowess of the country.
 Following positive outcomes may be expected from the use of CBDC:
 Cryptocurrencies and stable coins, have become much more
pervasive than ever but lack the backing of sovereign agency and
thus remain vulnerable to risks. RBI could retain monetary
sovereignty against the rise of private digital currencies by
introducing risk-free CBDCs backed by them as legal tender.
 National CBDC ie „Digital Rupee‟ is expected to prevent Digital
Dollarization by other country CBDCs. If Indian CBDC is not
introduced and Indian citizen transact with foreign Interest bearing
CBDCs which function both as cash and as financial assets like bonds
and securities may pose risk of significant international spill-over
effects if permitted. This may not only restrict the ability of India to
independently set its domestic monetary policy, but given the data
embedded in CBDCs, could also be a data security risk. Having a
national CBDC as an alternative to these other currencies is therefore
a necessary strategy.
 Many private players specially mobile payment systems are offering
alternate payment services and they have become dominant among
the public because passing of incentives to public by these players.

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 Digital Currency concept paper

These entities have also combined several other financial services

with their social media apps. However, they pose risks – of
monopolies, high entry barriers, potential misuse of data, safety and
security of technology and may not offer interoperable services,
leading to fragmentation of markets, increased costs and
complexities, ultimately impacting the consumer. CBDC may address
these concerns by ensuring continued retail access to central bank
money. It may replace cash as a competitor to these private
payments systems.
 CBDCs may potentially lower transaction costs for cross border
payments which at present suffer from several market failures viz., of
lack of speed, costs and opacity.
 CBDCs provide the option of ascribing interest rates to the currency
itself which is not possible for cash. Interest-bearing retail CBDCs
issued directly to households potentially raises central bank‟s ability
to improve and control monetary policy transmission.
 CBDCs may facilitate more efficient and safe payment systems,
financial inclusion, foster innovation and competition, and improve
financial integrity by enhancing visibility and tracking of transactions,
and reduce illegal activities such as money laundering. It may enable
direct, timely and targeted transfers of aid or stimulus packages to
the public or firms in times of crisis.
 The Digital Rupee is set to be launched in FY 2022-23. Following challenges may
be overcome during this new journey of money in India:
 Direct access to central bank liabilities for households and businesses may
lead to enlarged role of central bank. Central banks would need to rapidly
build newer capabilities even in a with „Hybrid/Intermediated/Synthetic
CBDC‟ model.
 Design features of CBDC would need to take into account various
demographics including levels of technological literacy and ease of use to
avoid „digital divide‟. A supportive environment in terms of efficient
internet connectivity and speed; safe, secure and affordable electronic
devices; and technological literacy and ease of use would be required for
optimum penetration of Digital Rupee.
 Significant considerations would have to be given towards citizen‟s
preference of Privacy along with Accessibility. Cash is still significantly
popular because it provides for anonymity. However, if the Digital Rupee
is designed to be fully anonymous like cash, concerns of money
laundering, tax evasion or financing illegal activities may not be addressed.
Policy responses could include maintaining privacy of data and
transactions, even from the central bank, except when required for law
enforcement. Although falling short of full anonymity offered by cash,

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 Digital Currency concept paper

CBDC can be designed to offer anonymity, or pseudonymity, in varying

degrees, relative to alternative payment methods.
 India in recent past has done massive digitisation of processes, most significantly in
financial transactions. The RBI has been actively encouraging the development of
the digital payments space. National Payments Corporation of India (NPCI), a
not-for-profit company, promoted by a large number of private and public sector
banks, in 2007 understood the diverse needs of the economy and came up with a
number of products that help in making retail payment for different types of
transactions. The game-changer in this space has been the Universal Payment
Interface (UPI), which acts as a real-time payments system that can enable the
instantaneous transfer of funds between two banks, using a mobile device. Using
this platform, apps like Google Pay, PayTm and PhonePe have popularized digital
payments tremendously. However, while the private sector-based payments
system may work well enough within India, it is only a sovereign-backed digital
currency that will be trusted in a global system.
 A decision is yet to be taken on the private currencies. Prohibiting such monies
may prove to be difficult to enforce, given the difficulty of tracing them, and their
decentralised and borderless framework. The Inter Ministerial Committee in its
report recommended banning of private cryptocurrencies but notes that there
may be ways to circumvent the prohibitions through use of unauthorised VPNs or
leveraging the fragmented regulatory landscape to shift to friendlier jurisdictions.
It has also been argued that banning would move the activities underground,
making them difficult to monitor, particularly for use in illegal activities. Hon‟ble
FM has stated that a decision on legal status of private digital currencies will be
taken by Government, tax @ 30% has been introduced on profit earned on
transfer of private digital currencies falling under digital asset.

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