Context: Recently, the uncertainty over the legal status of cryptocurrencies is unnerving Indian investors who hold around $1.5 billion (Rs 10,000 crore) in digital currencies.
Background

• In April 2018, RBI banned banks and other regulated entities from supporting crypto transactions after digital currencies were used for frauds.
• In March 2020, the Supreme Court struck down the ban as unconstitutional.
• The government, which plans a law to ban private digital currencies, favours a digital currency backed by the Reserve Bank of India.
• The existing investors could get breathing space to exit their holdings in the event of a ban on trading, mining and holding cryptos.
• The proposed legal structure may seek declarations of holdings and transactions retrospectively from investors and traders.

Cryptocurrency Law proposed by RBI

• The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will prohibit all private cryptocurrencies.
• It will lay down the regulatory framework for the launch of an “official digital currency”.
• A 3-6 month exit period prior to banning the trading, mining and issuing of cryptos has been discussed in inter-ministerial discussions regarding the law.
• The high-power inter-ministerial committee has previously recommended a ban on all private cryptocurrencies.
• The sources have said that the proposed law will be prospective, even though declarations of holdings and transactions may be sought retrospectively.

Digital Currency of RBI

• The RBI had said central banks are exploring DLT (Distributed Ledger Technology) for application in improving financial market infrastructure.
• The RBI is considering DLT as a potential technological solution in implementing central bank digital currency (CBDC).
• A recent survey of central banks conducted by the Bank for International Settlements found that some 80 per cent of the 66 responding central banks have started projects to explore the use of CBDC in some form.
• The RBI had expressed concern over other cryptocurrencies, saying they can be used for illegal activities, and poses a threat to financial stability.

What is Distributed Ledger Technology (DLT)?

• It is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time.
• A distributed ledger is a database that exists across several locations or among multiple participants.
• A distributed ledger is decentralized to eliminate the need for a central authority or intermediary to process, validate or authenticate transactions.
• The DLT proponents say digital ledgers can be used in multiple areas, including government and business dealings, in addition to financial transactions.
• The experts believe that digital ledgers can be used in tax collection, property deed transfers, social benefits distribution and even voting procedures.

What is Central Bank Digital Currency (CBDC)?

• The central banks are keen on designing their own network of digital payments by officially issuing what is called a Central Bank Digital Currency (CBDC) in order to prevent extreme decoupling.
• It is a legal tender and liability of a nation's central bank in the digital form.
• It is denominated in a sovereign currency and appears on the balance sheet of a nation's central bank.  
• It is a digital currency which can be converted/exchanged at par with similarly denominated cash and traditional central bank deposits of a nation.
• The novelty of such general-purpose CBDCs lies in its character of being legal tender.