Virtual currency (also referred to as virtual money) is an unregulated digital currency, controlled by its developers. This currency is used by a virtual community. One of the most popular digital currencies is Bitcoin, which was introduced in 2008, primarily to address the trust issue that was faced due to the 2008 financial crisis. Bitcoin is based on blockchain, a decentralized distributed ledger technology and is also referred to as cryptocurrency. Blockchain creates an immutable ledger, which functions on consensus protocol, thereby sharing the record with all the concerned stakeholders and is not governed by a regulator. Additionally, blockchain technology provided a unique method of storing data that was resistant to modification.

Cryptocurrency is similar to a fiat currency (or "money" as commonly referred to). As in the case of fiat money, cryptocurrency can serve as a medium of exchange, a store of value, a unit of account, or towards the final discharge of debt. However, compared to fiat currency, cryptocurrency does not have a legal tender status in any state or country.

While there are many countries that have banned cryptocurrency, the Reserve Bank of India (RBI), India's central bank and money regulator, issued a circular in 2018, that prohibited banks as well as financial institutions from dealing in virtual currencies as well as providing any services to facilitate them. However, this circular was struck down by the Supreme Court of India on 4 th March 2020. This verdict is considered a historic verdict especially for start-ups in the virtual currency industry. The Supreme Court of India, in its verdict, also stated cryptocurrency is not banned in India and there was very little evidence of threats to the Indian banking system due to cryptocurrency.

Digital currency which is issued by a central bank is referred to as central bank digital currency or CBDC. For example, digital renminbi or digital RNB is a CBDC issued by the People's Bank of China and is the first digital currency to be issued by a major economy. All other digital currencies other than CBDCs are termed as non-CBDC.

Governments across the world view non-CBDC sceptically as they believe that non-CBDCs may have a negative impact on the monetary systems established earlier by central banks and regulators of the country. Another concern over the acceptance of non-CBDCs is their ability to aid illegal activities. Since there is no regulatory control, it would be difficult to track and act on such activities. While this concern is valid, it should also be noted that fiat currency has also been used and is still being used for such activities. Defining an appropriate regulatory framework for anti-money laundering could help in mitigating this potential risk.

Along with legality concerns, those related to fraud and security have been hurdles in the acceptance of non-CBDCs. Several cryptocurrency-related frauds including initial coin offerings, pump and dump schemes, or Ponzi schemes have resulted in governments delaying acceptance of non-CBDCs. Security concerns arising due to vulnerable wallets, potential hacking and cyber-attacks, selfish mining, double spending as well as 51 per cent attacks have also resulted in non-CBDCs being viewed suspiciously. However, most of the security concerns are related to cryptocurrencies and not the underlying blockchain technology. Appropriate measures could be taken to mitigate these risks.

RBI has started exploring ways to address these concerns and look at adopting the use of digital currency. The Cryptocurrency and Regulation of official Digital currency Bill 2021, which has been introduced during the budget session, looks at defining a regulatory framework for launching an official digital currency while prohibiting all private cryptocurrencies. Currently, the Indian government is in consultation with all key stakeholders. With cryptocurrencies gaining prominence across the world, an increasing number of investors, and the Indian government due to this upcoming industry, it would be interesting to watch this space on how digital currency would be brought into the mainstream.

The author is Associate Professor – Information Systems & Technology, Chairperson (ARC and IT), Co-Chair (PGDM), T A Pai Management Institute

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