We live in a world, where technology is dominating every sector, we enter in. This is not just limited to the production, and manufacturing sector, but also the Power, Infrastructure, and Energy sector. With the global community issuing guidelines, and frameworks regarding regulation of technology, the world now looks towards India. The Indian subcontinent, which is naïve with regards to such technology intends on incorporating the aspects of digital currency, and cryptocurrency to walk hand-in-hand with the world.
However, this task wouldn’t be as easy as it seems to be. With the announcement of digital currency for India both by the Indian finance minister Nirmala Sitharaman, and the Reserve Bank of India (RBI) by the year 2022-23, an array of changes would be followed. These changes would in turn affect the legal perspectives of various sectors. In an attempt to enumerate upon the effect of digital currencies, and cryptocurrencies in the Indian real estate sector, the authors have analysed the aspect of digital currency by covering its meaning, definitions, global perspective, and how would it play in the Indian scenario. Furthermore, the authors have differentiated between digital currencies, and cryptocurrencies. Towards the end, the authors have analysed the impact of both digital currencies, and cryptocurrencies on the real estate sector from the lenses of Indian legal scenario.
Introduction – What is Digital Currency?
The digital currency, as the name suggests, is the digitalized form of currency. Digital currencies have completely changed the world’s view on the notion of money. The rise of private digital currencies such as cryptocurrencies has led the world’s central banks to research digital currencies, and a few countries are planning to introduce Central Bank Digital Currency (CBDC). Digital currency does not have any physical form, and it is available only in digital form. Yet, digital currencies have the same features as physical currencies, i.e. they can be used for purchasing goods and services. It can be executed across borders. For example, a person located in the USA can make a digital payment to a person residing in India, provided they are connected to the same network. The money invested will be exchanged only through a digital format.
A digital currency can either be centralized or decentralized. For instance, physical currencies are fiat currencies which are centralized by their respective governments. In contrast, cryptocurrencies are decentralized currencies. Moreover, digital currency is based on blockchain technology.
The pros of digital currencies include their swift payment and the transfer of money between two countries at a lesser cost. The cons are that digital currency initially would not be user-friendly, and there is a high risk of hacking.
The Central Bank Digital Currency
As mentioned above, the CBDC is a form of digital currency issued by the central bank of the respective country.
There are two types of CBDCs: Wholesale CBDC and Retail CBDC. A wholesale CBDC is mainly used for re-solving liquidity issues in the time of emergency. Wholesale CBDC can be used for the financial reserve that the central bank holds, whereas Retail CBDCs are those that are used by the consumers or used for business transactions. CBDC would lead to lesser dependency on the physical form of currency.
Digital Currency in India
Initially, in 2013, the Reserve Bank of India (RBI) had shown its non-welcoming gesture for cryptos in India by issuing circulars to the public stating that there is no protection for their invested money in cryptocurrencies and there is no authority that is monitoring the same in India. In India, there is no rules or law to watch over cryptocurrencies or any virtual currency.
The RBI had been continuously warning the citizens from investing in cryptos, after whichit had proposed banning virtual currencies such as cryptocurrencies. In 2018, RBI issued a circular prohibiting banks and other financial institutions from regulating and dealing with virtual currencies. It also mentioned that no services must be provided to any individuals or business entities dealing with virtual currencies. In the suitInternet and Mobile Association v. RBI with regard to the ban on cryptocurrencies, a three-judge bench of the Hon’ble Supreme Court quashed the ban. The petitioner argued that crypto is not a currency but a tradeable commodity. In the said case, the Apex Court observed that virtual currencies do not fall within the reasonable limitation under Article 19(1)(g) of the Indian Constitution. The Apex Court mainly focused on two points – (i) the RBI does not have authority over the virtual currency since it is not a currency but a tradeable commodity, and (ii) even if considering the RBI has authority over the virtual currency, it cannot prohibit the petitioner or any other financial institution from dealing in cryptos. The Apex Court also mentioned that cryptocurrencies could be made lawful but under the control and supervision of the RBI.
Despite the verdict, the RBI remains un-welcoming of cryptos in India and has always had a suspicious eye towards it. In India, there is no sanction given by the Central Government for using digital currencies as a payment method.
In 2021, the Government of India drafted a bill for the regulation of cryptocurrencies called “The Cryptocurrency and Regulation of Official Digital Currency Bill,2021”. The main motive was to ban all the private cryptocurrencies and bring a centralized digital currency, but the said bill was not released to the public.
Section 2(47A) of the Finance Bill, 2022 defines a virtual digital asset as information or code, or number or token that has been generated through cryptographic means as notified by the Central Government in the Official Gazette.
At present, the Finance Minister of India in the Union Budget session announcedthe taxation for virtual currencies would be 30%, and the same has been inserted under section 115BBH (1) of the Income Tax Act, effective from April 2023. The finance minister stated that digital currencies would be introduced in the new fiscal year of 2022-23. Yet, there is no proper clarity given by the RBI or the Central Government on the legality of the cryptos.
In India, the RBI is working towards creating a digital currency –the Central Bank Digital Currency (CBDC), which will likely be introduced in 2023. CBDC would be a centralized digital currency that will be one among the other digital currency such as the cryptos. The only difference would be that the CBDC will be completely centralized. It is proposed thatCBDC would be considered as bank notes.
The issuing authority of digital currency plays a vital role in using them. Since CBDC is an electronic form of fiat money, it is important that it has to be centralized, and the government has to take authority over the same.
The cardinal difference between the crypto and CBDC is that CBDC will be the digital currency which is a form of fiat money but built on blockchain and other technologies, monitored by the respective governments, whereas cryptos are built on blockchain and are not being monitored by a single entity.
The main reason for introducing CBDC is to provide an alternative to virtual currencies. There are approximately15 to 20 million crypto investors in India. The GDP rate of India is also one of the main reasons to introduce CBDC by which the cost of printing and distributing the currencies can be reduced, which results in a cheaper currency management system. CBDC alsofocuses on financial inclusivity in the present banking sector in India.
If CBDC is introduced, it can improve entrepreneurship since it will be easier to make cross-border transactions. However, if the users are not aware of using the CBDC, it will eventually lead to a great loss for the central banks. It is so because India at this point of time lacks the proper infrastructure needed for the introduction, and regulation of digital currencies, and the technical know-how to use it.
TheFinance Secretary Mr. Somanathan has stated that just like gold and silver are a form of an asset but not in cash form, the same will be the digital currency. He further added that cryptocurrency will never be a legal currency and it is only legal tender.
Though India is adopting and welcoming the concept of its CBDC, it will have its own risks to be monitored by the respective authority. If there is a huge demand for digital currency, then the balance sheet would expand. There are chances that RBI might face credit risk. Apart from this, there is a lot of pressure on safeguarding the user’s information and their transactions from cyber threats.
Difference between Digital Currency and Crypto Currency
The introduction of CBDCs though is a child of the blockchain technology, there are a few differences between them apart from CBDC being centralized and cryptos being decentralized.
The first difference would be regarding the fluctuations of the rate of the coins. Since the RBI does not look upon cryptos, the rate of the coins fluctuates drastically, whereas if introduced by the RBI, the coin rate would not radically increase or decrease in the wink of an eye.
Secondly, people with online banking accounts can use digital currencies, whereas the only technology used for crypto transactions is through the blockchain method.
Thirdly, the transparency rate is higher in cryptos. The transactions are done through blockchain method and can be viewed through the public domain, whereas in the case of digital currency, the transaction details are available between the sender and the receiver and the central bank. The central bank decides what information can be shared in the public domain.
Fourthly, there will be a transaction fee in the digital currency, whereas in crypto, there is no transaction fee, except in certain cases where there exists transaction fees in cryptocurrencies as well.
Digital Currency across the World
There is increased hunger across the world to introduce CBDC. Apart from India, 86 countries are planning to introducedigital currency in March 2022. 87 countries, including Nigeria, the Bahamas, and seven countries in Eastern Caribbean Union have launched their own CBDCs. Nigeria launched its CBDC in October 2021, becoming the first African country to do so. The Bahamas introduced Sand Dollar in October 2020. It is the world’s first CBDC that has been covered for the entire country. In the Eastern Caribbean Union, seven countries have launched their own CBDC. The CBDC can be used without bank accounts and it is also known for speedy transactions. Russia has announced that it has completed its initial trial for CBDC which is to be called as “Digital Ruble”. Sweden’s e-krona is its CDBC which is also now being tested. China is the first country in the world that has tested digital currency in the year April 2020.
Role of Digital Currency and Block Chain in the Real Estate Sector
With the introduction of blockchain technology in the real estate sector, an array of changes regarding the functioning of contracts undertaken in the real estate sector. This includes an alteration in the efficiency of the working of contracts and proper due diligence, which plays a pivotal role in its implementation. A few essential facets of the same include:
- The introduction of blockchain technology in the modern-day real state sector has challenged the conventional working of the real estate sector, which involved face-to-face meetings between the parties or via These transactions have now been switched over to the online sector. One of the primary changes that would encompass the real estate sector would be the aspect of tokenization. The idea of tokenization has evolved to provide a nexus between the real estate investing sector and blockchain technology. With the help of tokenization, the owners could garner surplus funds in an effective manner. This is usually done with the use of ‘smart tokens.’ The notion of tokenization revolves around ‘fractional ownership of assets.’ This essentially means that a property is brought into the market, and people are enabled to buy a part of it. This could be equated to the dematerialization of shares. Just as how the shares of a company are converted into an electronic form from the physical form, tokenization does exactly the same with respect to the property in the real estate sector. The process of tokenization of the real estate sector would assure ample liquidity in the sector. This is because of the efficient and hassle-free buying/selling of property/properties either in part or in whole because the property is in a token format, which in turn is digital in nature. The liquidity of these tokens strikes a higher note because of the fractionalization of these real estate tokens. The question of security has also been taken care of in regards to tokenization of the real estate properties.As all the details are mentioned in the digital token, security and transparency are maintained.
- Another aspect of blockchain technology in the real-estate sector could be the ‘smart contracts’ based on blockchain. These ‘smart contracts’ based upon blockchain are nothing but a form of digital contract, where programs are stored on a blockchain, which runs only when the conditions agreed prior to the running of the contract are met. This becomes beneficial as it is dependent upon the Latin maxim- consensus ad idem, which means the meeting of minds between the two individuals who intend to create contractual obligations with each otherwithout the involvement of any third party or intermediary. However, there is a catch here. Even with the existence of these smart contracts, the nature of such would be similar to that of an NFT (Non-Fungible Token). Furthermore, there exists a big question mark on how would the stamp-duty work out with regards to smart contracts in the real estate sector. The problem arises due to the differences between cryptocurrency and digital currency. If an analysis is drawn toward the global perspective, we see that there exist regulatory regimes which act as a blockade to the effective implementation of blockchain technology.
If real estate transactions are being automated, then the usage of blockchain in real estate transactions can result in speedy transactions and reduce the fraud rate. There are larger chances of reducing the corruption rate when the transaction is completely automated and also when the payment can be made through digital currencies.
If blockchain is used in transactions, the proposed buyer of the immovable property can save a lot of time in researching the details of the immovable property, from the ownership of the property to tracing the government records of the said immovable property.
Now that the central bank has decided to launch its own digital currency, let us see how it can benefit the real sector in India. After introducing Real Estate Regulatory Authority (RERA) in 2016, the Real Estate Sector has gained transparency among house buyers, builders, promoters, developers, and bankers. The fraudulent activities have drastically become lesser compared to the time when there was no RERA. At present, virtual digital currencies cannot be used for real estate transactions. While executing a real estate transaction, a certain amount of tax must be paid to the respective state government in the form of stamp duty and registration charges depending upon the document being executed. Since virtual digital currencies that are now being used are not entirely legal in India, they cannot be used for paying taxes to the government. Whereas, once the respective central banks introduce digital currency, it can be used for real estate transactions, resulting in even more transparency in the real estate sector. With the RBI’s announcement to introduce digital currency in the Financial Year 2022-23, it is said to escalate the digital economy of the country. As per thestatement of the finance minister:
“Digital currency will also lead to a more efficient and cheaper currency management system. It is therefore proposed to introduce the digital rupee using blockchain and other technologies to be issued by the Reserve Bank of India, starting 2022-23”
The Way Ahead
The Indian economic system is based on the system of mixed economy, where both state and private participation is equally encouraged. This also encompasses the notion of regulations built by the required agencies/ministries.
- Currency in India is regulated by the RBI. In a similar manner, if digital currency is introduced in the country, the RBI would be the sole authority that would govern the regulation of the same. The facet of Central Bank Digital Currency (CBDC) would prove to be a boon, especially to the real estate sector in India. The payments made in the form of CBDCs are nothing but a final settlement which, when transacted, is equivalent to transacting in cash. The main reason for glorifying the CBDCs in the real estate sector is the reduction of the interbank settlement, coupled with the role of intermediaries. With the regulations in place, the RBI would monitor and regulate the CBDCs in the same manner as paper money, appearing on the liability side of thecentral bank’s balance sheet.
- Regulation of blockchain technology in India could be a tacky task. The Ministry of Information and Technology (MeitY) could be made the ‘regulator’ of the blockchain technology that would be implemented as a policy by the government. Now, the regulation of blockchain technology primarily presents two challenges that the Government of India (GoI) would face. They are:
(a) Section 17 of the Registration Act, 1908, mandates the sale of immovable property for the value exceeding Rs. 100 to be registered with the registrar/sub-registrar of the competent jurisdiction. However, after the implementation of blockchain technology in the real estate sector, the role of the registrar/sub-registrar would be rendered useless. Blockchain technology would halt the use of transactional activity in paper form and switch to the online form. Moreover, the Transfer of Property Act, 1882 would also be subject to amendments.
(b) The real estate sector in India comes under the State List, and not the Union List. This essentially means that the laws made under the real estate sector are subjected to amendments by the states even if the Union makes a law regarding the same. Now the issue arises due to disparities with regard to technology. If blockchain technology has to be implemented in the real estate sector, then the technology of advanced nature is to be installed in all states. The reason for the same is the nature of blockchain technology which undertakes large-scale transfers and transactions of data. In the present scenario, the Indian Energy Sector has its own issues in motion. This would result in the revamping of the technological sector in the Indian landscape, as was seen when theGoods and Services Tax (GST) was implemented through legislations in the country.
(c) The regulation mechanism for smart contracts cannot be ignored when it is applied to the real estate sector. In the earlier paragraphs, we discussed how smart contracts would play a pivotal role in the reformation of the real estate sector if blockchain technology is implemented. There exist certain aspects which need to be taken care of. The primary issue is the utility of blockchain. The utility of blockchain could be put under question in cases where paperwork cannot be eliminated completely. Another issue regarding the payment of stamp duty in such transactions. If the stamp duty is to be paid, then creating a separate registry for the same would compromise the confidentiality and secrecy that comes with blockchain technology.
The current trend of raising investors in cryptocurrency has led the central bank of various countries to decide to issue their own digital currency. The current situation of Digital Currency and implementation of the same in India or in any other country is not clear. There are several challenges to be dealt with before introducing the same such as choosing the right kind of technology.
By introducing CBDC, the financial structure of the country would change. It requires a sound infrastructure and a regulatory authority. CBDC should have its own dispute resolution system, security protocols, and a robust auditing process to ensure the safety of transactions. A public record must be maintained in order to check the number of digital currency users.
In the era of Bitcoin and Ethereum, CBDC has the potential to be the most important invention in the world of finance if introduced and used correctly.
In the real estate sector, the development of blockchain could entirely change the way real estate transactions take place in terms of sharing the information of the immovable property, executing the deeds and paying the taxes through digital currency ensuring transparency.
The views are that of the Author and it has nothing to do with the organization that they are associated with.
About the Author
Ms. Brinda Kannan is a Legal Associate at King Stubb & Kasiva.
Mr. Abeer Tiwari is a 3rd-year B.A. LL.B student from Balaji Law College, Pune, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Muskaan Singh and Jhalak Srivastav
Senior Editor: Hamna Viriyam
Associate Editor: Abeer Tiwari
Junior Editor: Tisa Padhy
Preferred Method of Citation
Brinda Kannan and Abeer Tiwari, “The Inception of Digital Currency and Blockchain Technology in the Indian Real Estate Sector” (IJPIEL, 13 June 2022)