Will CBDCs limit the growth of crypto in India?

The Reserve Bank of India (RBI) is currently in the testing phase of Central Bank Digital Currency (CBDC), also known as the digital rupee. The CBDC is expected to be launched very soon, and it has the potential to have a significant impact on the growth of cryptocurrency in India.

According to Statista, revenue in the Indian crypto market is projected to reach $222.70 million in 2023 and reach $324.00m by 2027, growing at a CAGR of 9.83 per cent.

89 per cent of India’s crypto community is below the age of 35, according to a report shared by CoinSwitch in 2022. This indicates the potential of crypto penetration into the core investing age group of India. However, will this streak of growth be affected by the introduction of the CBDCs or the digital rupee?

This report delves into the potential implications of CBDCs on the crypto market in India, considering factors such as regulatory measures, competition, and public perception.

What is CBDC or digital rupee?

CBDC or Central Bank Digital Currency is a digital or virtual currency that is issued by a central bank. RBI’s CBDCs will be a digital version of the Indian rupee, designed to be used alongside cash and other electronic payment methods.

"CBDC is the future of money," said Shaktikanta Das | Image credit: ANI

Currently, CBDCs are in the pilot stage and being tested for retail users across 4 cities in the country. With CBDCs RBI is planning to increase financial inclusion across the country by making it easier for people who do not have access to traditional banking services to participate in the financial system.

CBDCs can also facilitate faster and cheaper payments, as they would not be subject to the same processing fees as traditional payments. With CBDCs, it would be easier for RBI and the government to track and monitor the financial transactions of the holders. 

Can CBDCs hinder crypto adoption in India?

There are several reasons why CBDCs could limit the growth of crypto in India, including the trust and stability that they bring to the table. 

If CBDCs are introduced in India, they could potentially compete directly with private cryptocurrencies in terms of offering a digital payment option. 

In an interview with centralbanking.com, RBI Governor, Shaktikanta Das talked about CBDCs in detail and called it the future of money. 

Shaktikanta Das | Image credit: ANI

"CBDC is going to be the future of money. Therefore, we are preparing ourselves for that. By the end of this month, we hope to reach about 1 million users of retail CBDC. That is for domestic payments. But cross-border payments will also become much quicker, more seamless and very cost-effective. That is another area where a lot of attention needs to be given. We are constantly in dialogue with other central banks that have introduced or are introducing CBDCs. That is going to be the future,"  Das said.

CBDCs, backed and issued by the central bank, would likely enjoy higher levels of trust and security compared to private cryptocurrencies, which are perceived as more volatile and speculative. 

As a result, CBDCs have the potential to attract a substantial portion of the market that currently favours cryptocurrencies for the advantages offered by blockchain technology. 

According to the latest data released by RBI, there are more than 1 million retail CBDCs users in the pilot testing, accounting for more than millions of small-scale transactions. Over 262,000 merchants became a part of this initial testing process to showcase the scalability of the digital rupee. 

With CBDCs also likely to be built on blockchain networks, their increased adoption of digital payments may diminish the necessity for alternative digital currencies. 

Can CBDCs promote crypto adoption?

One of the primary concerns regarding the growth of cryptocurrencies in the country is regulatory uncertainty. The RBI and other financial authorities have adopted a cautious approach towards cryptocurrencies, which has led to multiple crackdowns and uncertainty in the market. 

CBDC adoption can educate the masses about blockchain technology | Image credit: Pexels

With the introduction of the national CBDC, the regulatory landscape may become clearer, offering a more stable and regulated digital payment option for the citizens. 

This increased clarity could result in more people knowing about blockchain technology and as a consequence of which crypto can gain more attention from citizens. 

While talking to Republic, Gaurav Dahake, CEO of BNS crypto exchange said,  “Rather than stifling the growth of cryptocurrencies, CBDCs can play an instrumental role in familiarising the masses with the concept of digital currencies, blockchain technology, and its potential benefits. This understanding and acceptance of digital currency technology could trigger increased interest and confidence in cryptocurrencies, leading to wider adoption.”

“CBDCs are issued and regulated by the central bank, making them inherently different from decentralised cryptocurrencies that operate on blockchain networks. The e-Rupee is intended to complement traditional fiat currency and UPI, offering efficiency, security, and cost-effectiveness for digital transactions within the country's financial system,” said, Rajagopal Menon, Vice President, WazirX while talking to Republic about the impacts of CBDC on crypto market. 

“Given these fundamental differences, it is unlikely that the introduction of the e-Rupee or any other CBDC in India would pose a direct threat to cryptocurrencies. Instead, CBDCs and cryptocurrencies are likely to coexist and serve different use cases within India's financial landscape,” Rajagopal added. 

Image credit: Unsplash

While discussing the potential impacts of RBI's CBDC on crypto, Ashish Singhal, Co-founder and CEO, CoinSwitch, suggested that both technologies can co-exist and serve different purposes.  

"CBDC could modernise payments and remittances, as well as introduce benefits such as the programmability of money. A CBDC's value is the same as the representative fiat currency," said Ashish.

"Crypto, on the other hand, serves in transaction settlement on blockchain and enables in digitalisation--or tokenisation--of real-world assets," Ashish added. 

If RBI makes it easy for people to convert their CBDCs into cryptocurrencies, this could make it more convenient for people to invest in crypto. Additionally, if the RBI develops a payment mechanism that enables blockchain-based currencies to be used on a mass scale, this can further enhance the use case for cryptocurrencies. 

As CBDCs are still in the pilot testing phase and implementation is awaited, it is challenging to predict their precise effects on the growth of cryptocurrency in the country. 

CBDCs have the potential to revolutionise the financial landscape by providing digital alternatives to traditional currencies, potentially attracting a significant portion of users who currently rely on cryptocurrencies for their advantages. 

However, it is crucial to observe how CBDCs are integrated into the financial system, their regulatory framework, and their impact on market dynamics before determining their exact influence on the crypto market's growth in the country.