Contemplating a fiat cryptocurrency for India

Written by Anshuman Jaswal || October 10 2017

The Indian central bank, the Reserve Bank of India (RBI) is considering the possibility of introducing a fiat cryptocurrency in the country.

If successful, this could be a big boost for the economy. However, we are still in the preliminary stages of this development. In the past, the RBI has been quite conservative in its approach towards bitcoin and other similar non-fiat cryptocurrencies. It has always been apprehensive of complex financial instruments that could be used for speculative purposes, resulting in losses for retail investors. There is an added inherent concern about its ability to regulate cryptocurrencies that do not lend themselves well to national boundaries. The possibility of there being an investment bubble, due to the high level of interest around cryptocurrencies and the economy overheating as a result, has made non-fiat cryptocurrencies a no go area for the central bank in the past.

The Indian market has traditionally boasted a strong technology sector and this expertise also lends itself well to Fintech. A number of Indian firms are working on blockchain technology, making it a relatively straight forward switch for some of them to work on the possible use of cryptocurrencies, should these be encouraged by the central bank. The recent developments in the Chinese market and the measures taken by its financial regulators to clamp down on cryptocurrency related speculation lend credibility to the Indian approach. However, if the RBI is very conservative, it could result in the Indian markets falling behind on the learning curve, specifically regarding cryptocurrencies and blockchain based technology in general.

Cryptocurrencies can provide a fillip to the economic activities in a market, while also allowing the regulators a greater degree of control over economic activities. The recent Indian initiatives to control money laundering such as Demonetization and tighter scrutiny by Income Tax authorities could be complemented by the use of a fiat cryptocurrency. It might also lend itself well to the creation of smart contracts, that are expected to be a major source of innovation in the future.

In addition to a fiat cryptocurrency, the RBI has been studying the potential for bitcoin and similar currencies for some time. It is believed that it is soon going to release a policy framework, under which the use and trading of such currencies would be regulated by the central bank and the capital markets regulator Securities and Exchange Board of India (SEBI).

Therefore, progress is being made in the Indian financial markets with regard to new technology. However, the Indian Government and regulators have consciously chosen to take a more conservative approach to avoid overheating the capital markets and the economy overall, in case there is a high level of speculation resulting from the use of cryptocurrencies. It would be interesting to see whether the Indian approach pays dividends, or results in the country trailing its global counterparts when it comes to the innovation in this field.