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Is Cryptocurrency Legal in India? Union Budget 2022: India to Tax Crypto at 30%

Is Cryptocurrency Legal in India? Union Budget 2022: India to Tax Crypto at 30%


  • GS 3 || Economy || Banking & Financial Sector || Money

Why in the news?

  • The Union Budget for 2022-23 has been tabled in Parliament by the Union Minister for Finance and Corporate Affairs.
  • The announcement of the government’s decision to introduce the Digital Rupee – India’s version of a Central Bank Digital Currency (CBDC)– is one of the key attractions of this year’s budget.
  • The digital rupee will be issued using blockchain and other technologies by RBI starting 2022-23.

What is a CBDC?

  • CBDC is a legal tender issued by a central bank in a digital form. It is similar to a fiat currency issued on paper and is interchangeable with any other fiat currency.
  • Role of RBI
  • The Reserve Bank of India will launch the CBDC in the upcoming financial year of 2022-2023. This follows the government’s plans to launch the CBDC which will be backed by blockchain technology.

The fate of other digital currencies

  • Digital rupee will be India’s first and sole digital currency, according to the Secretary of the Department of Economic Affairs. It was clarified that taxing crypto assets (30%) does not legitimate their use, as crypto-assets encompass more than just cryptocurrency. Crypto, in a broad sense, is defined as a digital asset that employs cryptography.
  • The term “Virtual Digital Assets” (VDAs) was used in the Budget. VDAs are a subset of all digital assets traded on the blockchain, including cryptos, non-fungible tokens (NFTs), and any other virtual asset.
  • The Draft on Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, seeks to outlaw all private cryptocurrencies.
  • The Bill also aims to lay down the regulatory framework for the launch of an “official digital currency.

Countries that have already rolled out their national digital currencies

  • 1st country which introduced digital currency is the Marshall
  • China started a trial run of its digital currency e-RMB amid the pandemic.
  • Sweden is conducting real-world trials of their digital currency called
  • The Bahamas has issued a “Sand Dollar” to all citizens.

The rationale behind the launch digital rupee or CBDC

  • More secure and risk-free transactions- According to the Prime Minister, the central bank’s digital currency, also known as the digital rupee, would make online payments more secure and risk-free in the future, as well as enhance the digital economy. He also stated that the digital rupee will make the creation of a global digital payment system easier.
  • Offering new and fresh opportunities in Currency logistics– Furthermore, the introduction of the digital rupee will revolutionize the fintech sector by offering new opportunities and reducing the hassle of handling, printing, and managing currency logistics.
  • Reducing the volatility- The national digital currency will be regulated by the RBI. So, there will be less volatility compared to other digital currencies.
  • Positive effect Digital India – The introduction of the Digital Rupee will result in significant improvements in terms of economic digitization and ease of transfer, not just within the country but also across jurisdictions. Furthermore, the Digital Rupee will prevent currency counterfeiting and will aid the fight against dark money and corruption.
  • Negative interest rate- When circumstances are rough and the economic slow down is on the verge, a central bank may want people to spend their money, which is why negative interest rates exist. However, it is currently unable to do so because consumers will just withdraw their funds from banks. CBDCs will be the answer to this dilemma. CBDCs held in wallets might potentially be subjected to a negative interest rate.
  • Complement blockchain-led decentralized finance- Because all crypto assets’ final returns will be in sovereign currency, the digital rupee will help the virtual digital asset (VDA) markets by bridging the fiat-to-decentralized finance divide.
  • Reduction of systemic risk- There are over 3,000 privately issued cryptocurrencies in the globe. The main rationale for establishing a state digital currency, according to the IMF, is to curb the spread of private forms of digital money and that’s what India is adopting. 
    • According to industry estimates, India has 15 million to 20 million cryptocurrency investors, with total crypto assets valued at roughly 400 billion rupees. The majority of cryptocurrency exchanges invite individuals to invest and trade in cryptos without first offering basic information about the product and its hazards.
    • Backing of the government to end the apprehensions of the investors- There is a risk that these businesses would go bankrupt without any protection of a central authority. However, in the event of a financial catastrophe, the government will back the digital rupee.
    • Central bank-issued digital currency can ultimately lower the cost incurred by banks thereby assisting in the effective implementation of welfare schemes through DBT.

Challenges ahead

  • Not being seen as a need of the hour- From the perspective of the user, there is no compelling reason to convert to a CBDC because an increasing number of retail transactions are now conducted digitally or through UPI-based quick payment systems.
  • Potential cyber-threat- India is vulnerable to a variety of cyber-threats due to a lack of a robust data protection law. Cyberattacks may increase as a result of the introduction of digital money, posing a possibility of digital theft similar to the Mt Gox bankruptcy case.
  • Operational Challenges- Many operational challenges will arise throughout the deployment of CBDC, including KYC (know your customer) requirements and data protection concerns.
  • Challenges for the entire banking system- The impact of the digital rupee on the banking system is unclear; for example, if CBDCs are effective vehicles for retail savers, this could have a negative influence on bank deposits. As a result, the role of banks in loan creation, the RBI’s monetary policy, and other factors may be affected.
  • Regular Updation to Manage Future risks– Governance and control structures will need to be updated to manage the unique risks which will arise with CBDC.
  • Legal challenges:Several amendments to existing banking norms will be required to enable a digital currency (as opposed to paper currency).
  • Furthermore, the Riksbank of Sweden, which launched its e-krona initiative in 2017, is still researching the need for e-krona and its possible influence on the Swedish economy.

Way forward

  • Taking virtual digital assets and the digital rupee together- The government should work on making the virtual digital asset and the digital rupee work together. It will open doors not only for individuals who work or wish to work in the decentralized financial sector (VDAs), but also for those in the traditional finance industry.
  • Financial sector stability- The digital rupee can be issued via a distributed ledger, synchronized between the banks and the RBI, and not a centralized ledger, held solely by the RBI. This decentralized model will not end up in competition between RBI and other banks.
  • Creation of Law enforcement agency training- Prior to the implementation of the National Digital Money, the government must provide some vital items, such as law enforcement agency training, a policy of fundamental information assessed while issuing, and the ability to authenticate someone’s digital currency.
  • Regulatory sandbox should be created- Before creating its own digital currency, the RBI needs to create a regulatory sandbox with limited participants and pre-specified applications. Only then will the rupee be able to compete with other currencies.

What should be India’s approach with regard to Virtual Currency in furure/Long run

  • Instead of imposing bans, it would be more practical to launch public awareness campaigns to alert investors to particular risks and to track trades for fraud and scams.
  • In 2020, the Supreme Court had struck down a ban on the trading of cryptocurrency in India, which was imposed by the Reserve Bank of India (RBI).
  • The RBI must develop a comprehensive regulatory structure to license virtual currency intermediaries such as exchanges.
  • India’s financial sector could profit from a thriving cryptocurrency sector. As a result, in the face of increasing technological progress in the financial sector, it is important to reinforce India’s supporting regulatory mechanisms, which apply regardless of the type of instrument.


  • Though the adoption of a digital currency has a number of benefits for the government and India could profit from it but appropriate safeguards are need of the hour. 

Mains model Question

  • India’s financial sector could profit from a thriving digital -currency sector. Discuss