INTRODUCTION
The concept of Central Bank Digital Currency (CBDC) has been making waves in recent times. With digital transformation taking over every facet of our life, the Reserve Bank of India (RBI) has come up with its own form of digital fiat money: the Digital Rupee. Unlike the other cryptocurrencies such as Bitcoin, the Digital Rupee is backed by government recognition and regulation. As with any new advancements, it becomes necessary to explore the present legal safeguards and any potential legal and privacy implications for such an innovation.
THE DIGITAL RUPEE: WHY IT MATTERS
The RBI has defined the digital rupee as a legal tender issued by the central bank in a digital form. It is on par with any existing currency and may be used as a mode of transaction. However, it is not comparable to other forms of private virtual currencies. The RBI envisions mainly 2 types of digital rupee: Wholesale CBDC (e₹-W) and Retail CBDC (e₹-R).
Recent research has noted that public interest in digital currency is on the rise, with perceived benefits, such as faster transactions and enhanced security, could significantly improve the user experience. It eliminates the need for traditional banks and is available 24/7, with no hindrance to transaction speed. It provides enhanced financial inclusion with considerably lower transaction and manufacturing costs. Further, it improves monetary policy transmission and curtails illicit activities such as money laundering and tax evasion due to its digital traceability.
LEGAL IMPLICATIONS
Currently, the primary laws that govern currency and payment systems in India include the RBI Act, 1934, the Payment and Settlement Systems Act, 2007, the Negotiable Instruments Act, 1881, etc. The RBI Act provides for the issuance of currency by the central bank, limited to banknotes and coins. The Finance Act, 2022 amended the definition of a bank note to bring digital currencies within its ambit. The amendment now allows the RBI to issue token-based CBDCs and open accounts for the eligible public. However, the provisions of the Negotiable Instruments Act, 1881 are yet to be amended to include digital currencies. Similarly, while the Payment and Settlement Systems Act, 2007 governs the regulation of payment systems, including electronic fund transfers, it needs amendment to cover CBDC systems.
Moreover, the existing legal framework remains ambiguous when dealing with smart contracts and international transactions. It also remains silent on the recourse available to the public in the event of any fraudulent transactions, owing to technological glitches or otherwise. It has been observed that the existing laws woefully fall short of adequately addressing the unique complexities of digital currency and are in need of a transformation. The questions introduced by CBDC require a legal overhaul or at the very least, extensive clarifications from the government and the judiciary. The expansion of international trade also presents a pressing need to conform to international standards, ensuring compliance with foreign exchange laws, Anti-money Laundering (AML) regulations and Know Your Customer (KYC) protocols.
PRIVACY IMPLICATIONS
A shift towards digital preferences raises important privacy concerns, especially regarding potential surveillance. While the digital rupee put forward the argument of transparency, the other side of the coin is covert collection. The data could be misused by the government or other parties if leaked, infringing on the citizen’s right to privacy. Furthermore, the transaction data could be used for consumer profiling and targeted advertising. For instance, the Digital Yuan introduced by the Chinese government has put its public on the edge. Reports suggest that the government can monitor transactions in real time and even set expiration dates on an individual’s funds.
The existing data protection laws, such as the Information Technology Act, 2000 and Digital Personal Data Protection Act, 2023, falls short of addressing all the critical nuances of the Digital Rupee. While the DPDP Act is a momentous step towards data protection, the Digital Rupee does not entirely conform to it. It lacks a clear method of consent collection and processing as mandated by the Act. Further, the Act allows for data transfer only to specified countries in contrast to the Digital Rupee, which fails to address compliance. The lack of transparency is in direct conflict with the right to information clause laid down in S.6 of the DPDP Act. Thus, while the DPDP Act is a noble attempt at data protection, its applicability and conflict areas with CBDC must be resolved in order to have any real effect.
THE ROAD AHEAD
The pivotal opportunity presented by the Digital Rupee can be harnessed only if our nation devises comprehensive strategies, not just promoting technology, but also aimed at managing the legal and privacy concerns associated with them. The International Monetary Fund (IMF) has underscored that any CBDC project must be shadowed by a strong legal basis from the start. The landmark case of Internet and Mobile Association of India v. RBI, which overturned the RBI ban on cryptocurrencies, has also highlighted the need for clear legislative backing. A new, dedicated legal code incorporating expanded definitions, management process, regulatory mechanism and transparency measures that clearly delineate how user data is to be collected, stored and utilised. Adequate measures targeting consumer protection and dispute resolution are also necessary.
Additionally, adopting strong technological measures is crucial. India must implement strong data protection measures, embedding encryption, pseudonymisation and strict access controls into the design of the CBDC. It is imperative that India aligns itself with the global standards, ensuring its interoperability with the CBDCs of other countries as laid down by BIS guidelines. In the long run, the possibility of an international treaty harmonising CBDC standards could be conceptualised, which would be internationally beneficial.
It may be wise to explore the possibility of a separate statutory body tasked with the regulation and monitoring of the Digital Rupee. The body could be conferred with quasi-judicial powers, equipped to deal with disputes and the formation of relevant guidelines and regulations. Additionally, such an authority could also take up research work and publish periodical reports on how the collected data is being used, fulfilling transparency requirements. Such an authority would serve as a watchdog of CBDC in India.
CONCLUSION
The Digital Rupee stands at the intersection of technology, finance and governance, serving as the harbinger of a new era of digital finance in India. While it is a bold step aimed at keeping up with the fast paced changes of the world, a delicate balance must be maintained between the legal and privacy implications and the various advantages it offers.
The Digital Rupee has the potential to redefine the very concept of money in this digital age. Ultimately, tackling these issues would dispel people’s fears, fostering a broader acceptance of a digital economy. By addressing the challenges head-on, fostering public awareness and ensuring inclusive implementation, India can set a global benchmark for CBDC adoption.
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