Digital currency is a form of currency that exists in electronic form and operates independently
of any central bank. It is secured by cryptography and uses Blockchain Technology for recording
transactions. Due to the advent of smartphones and other e-innovations, digital currencies are on
the rise. The three main types of digital currencies are- Cryptocurrency, Central Bank Digital
Currency (CBDC), and Stablecoins. These currencies are considered virtual currencies and fall
under the ambit of Virtual Digital Assets (VDA).

I. AMBIGUITY OF INDIAN LAWS AND THE RISE OF CBDC:

Although India is among the top countries in terms of the adoption and trading volume of digital
currencies, its legality remains ambiguous. The Supreme Court has overturned the Reserve Bank
of India’s stance on banning digital currencies, but its position is still shrouded in uncertainty.
The Government remains skeptical about these virtual currencies due to the anonymity of the
source and their utilization for illegal purposes.

In light of this, the government has proposed “The Cryptocurrency and Regulation of Official
Digital Currency Bill, 2021” which aims to clarify the status of virtual currencies in the country
and introduce a desirable framework for its implementation. In addition to this, the government
has also launched the country’s own CBDC called Digital Rupee.

Digital Rupee, which also enjoys the moniker “e₹”, is categorized as a legal tender and is an
additional alternative to physical money. This CBDC is currently accepted for cryptocurrency by
the RBI and it intends to impact the digital economy of the country. RBI has also made it
explicitly clear that although CBDC has a digital form it is different from cryptocurrency as it is
not a commodity or digital asset. It is a fiat currency that is exchangeable with cash.

The tax treatment of cryptocurrencies differs from CBDC. As per the Income Tax Act of 2002,
all gains from the transfer of cryptocurrencies, especially those not being Indian, will be taxed at
30% plus surcharge and cess. It is also subjected to 1% tax deduction at source. The Act also
prohibits any set-off of losses from the transfer of these VDAs. However, Digital Rupee is
exempted from this tax regulation.

CONCLUSION:

With the rising volume of cryptocurrency trading and the increase in cross-border transactions,
digital currencies might be the future of currencies in India. With limited access to traditional
banking services, the growing Indian population can make use of alternate means of financial
inclusion. A robust legal framework will further cement the stance of these virtual currencies and
supplement the growth of the economy.