India’s Shift Towards CBDCs and Prohibition of Private Cryptocurrencies: A Regulatory Overview

India is making a significant shift towards the total prohibition of private cryptocurrencies like Bitcoin and Ethereum in an effort to regulate risk in its volatile market. The government has expressed a preference for Central Bank Digital Currencies (CBDC), citing their benefits without the potential for instability or misuse.

The Reserve Bank of India (RBI) supports CBDCs as a safer alternative that can still achieve financial inclusion goals often associated with cryptocurrencies. In 2022, India launched its digital rupee, e₹, with over 5 million users and 16 participating banks, showing promising momentum in the digital finance sector.

RBI Governor Shaktikanta Das believes that CBDCs will lead to more efficient and secure financial services for vulnerable sections of society. The government plans to expand the use of CBDCs for domestic and cross-border transactions, potentially revolutionizing international trade and remittances.

Despite recognizing the potential of blockchain and crypto technology, India has maintained strict tax policies on cryptocurrencies, classifying them as Virtual Digital Assets (VDAs) and imposing a 30% tax on income and a 1% TDS on transactions over INR 10,000. The government remains cautious about private currencies, considering a possible ban following a synthesis paper endorsed by the Financial Stability Board and International Monetary Fund in 2023.

As India navigates regulatory shifts and taxation policies in the crypto space, CBDCs are emerging as a favored option for the future of digital finance in the country. The adoption of CBDCs could lead to greater economic inclusion and digital financial transformation across various sectors, solidifying India’s position in the global financial landscape.