The worldwide movement around digital money has been transformative to the global landscape of how we view money. As it relates to payments, digital currency (including Central Bank Digital Currency, or CBDC) creates a new way to conduct transactions and allows for new ways to create, capture, hold, and exchange value across borders (BIS, 2020).
Digital currency (traditional and other forms, including cryptocurrencies) will provide new opportunities for online payment systems and support less-developed nations in increasing financial inclusion. The new government, with a majority of RSP, has included the regulation of crypto mining in its manifesto, point 39.
This paper outlines how Nepal can exit its current state-constructed regime of prohibition of cryptocurrencies (including CBDCs) by creating and implementing a CBDC-based framework in which the Central Bank of Nepal can act as both the digital issuer of the currency and the regulator of digital transactions for cryptocurrency in Nepal.
Digital currency and cryptocurrency are often used interchangeably, but they are not the same. While both exist only in digital form and facilitate online transactions, their key differences lie in how they are controlled and secured. Digital currency refers to any form of money that is electronically stored and transferred, including both central bank-issued currencies (Central Bank Digital Currencies or CBDCs) and digital representations of traditional fiat currencies. These are typically regulated and controlled by a central authority, such as a government or central bank. On the other hand, cryptocurrency is a specific type of digital currency that operates on decentralized networks using blockchain technology.
Cryptocurrencies like Bitcoin and Ethereum are not controlled by any central entity, making them distinct in their decentralized nature and reliance on cryptographic techniques for security. In summary, while all cryptocurrencies are digital currencies, not all digital currencies are cryptocurrencies.
Nepal's Ban on Cryptocurrencies
The Nepal government has issued different notices in order to ban cryptocurrencies like Bitcoin for a long time, claiming that crypto mining can consume massive energy resources and pose trade concerns, cause outflows of money, and threaten financial security, among other issues.
Deficit of Pro-Bitcoin Political Leadership
However, Nepal Rastra Bank (NRB), in its Monetary Policy 2021/22, also announced a study on CBDC in Nepal. NRB’s entry into CBDC, as highlighted in its 2022 concept report, not only aims to modernize Nepal's payment infrastructure but also establishes an important premise for the eventual incorporation of decentralized cryptocurrencies into a regulated financial system.
Blockchain Technology in Regulating CBDC and Cryptocurrency
Blockchain technology is one of the most efficient systems and acts as the backbone of digital currency, including cryptocurrency. It is a decentralized and distributed ledger used to record digital transactions on numerous computers in a secure way. It ensures that transaction records are transparent, immutable, and secure, and cannot be changed without the agreement of the entire network.
In cryptocurrency, blockchain can help connect intermediaries with banks and can directly track transactions without difficulty. The decentralized nature of blockchain makes it very difficult for fraud or hacking to occur because of reduced opportunities for compromise and security breaches.
Blockchain technology has many applications beyond cryptocurrency, including supply chains, healthcare, voting, and financial institutions. In Nepal, implementing blockchain technologies could lay the groundwork for Central Bank Digital Currency (CBDC), creating a more transparent and reliable system for consumers using digital currency and reducing risks associated with traditional banking.
International Examples of Cryptocurrency Adoption
While Nepal has taken a cautious approach, many countries have already made bold moves to adopt or regulate cryptocurrencies, achieving varying levels of success. El Salvador has become the first country to adopt Bitcoin as legal tender by introducing the Chivo wallet as a state-backed digital wallet for Bitcoin transactions and mandating Bitcoin alongside the U.S. dollar. Similarly, in 2024, to secure a $1.4 billion loan from the International Monetary Fund (IMF), the government scaled back its Bitcoin initiatives, making its use optional for businesses and curbing government purchases of the cryptocurrency.
Brazil has also introduced a framework that requires cryptocurrency exchanges to adhere to stringent regulations set by the Central Bank of Brazil (BCB), focusing on anti-money laundering (AML) measures and transaction security. Brazilian citizens can purchase cryptocurrencies like Bitcoin or Ethereum through licensed exchanges using the Brazilian Real (BRL), promoting regulated trading. However, unregulated peer-to-peer transactions are discouraged, ensuring transparency and minimizing fraud risks.
Switzerland has established itself as a crypto-friendly nation, with Crypto Valley in Zug emerging as one of the world's leading hubs for blockchain and cryptocurrency businesses. While Switzerland has not adopted cryptocurrencies as legal tender, it provides a favorable regulatory environment for investments and businesses in digital assets.
The Swiss government has implemented clear regulations on cryptocurrency taxation, anti-money laundering (AML) compliance, and other requirements, fostering innovation and encouraging growth in the sector.
Other countries like the U.S.A., Canada, Japan, the Central African Republic, the UAE, and the European Union have also been regulating and treating cryptocurrency as a national asset. Using other countries’ examples, Nepal should not replicate any single model but should adopt a controlled intermediary system suitable to its context.
How Can Nepal Legalize Crypto?
Nepal Rastra Bank (NRB) could establish a legal framework where it not only issues a Central Bank Digital Currency (CBDC) but also facilitates the regulated purchase of cryptocurrencies through blockchain technology. By enabling the purchase of cryptocurrencies with CBDCs, NRB can ensure that crypto transactions are conducted within a controlled, legal environment, ensuring the legitimacy of these digital assets. Blockchain technology would play a critical role in this process by providing a secure, transparent, and immutable ledger for all transactions.
Under this model, NRB could directly buy cryptocurrencies using CBDC reserves and regulate the process of buying and selling cryptocurrencies through licensed exchanges. Blockchain technology would ensure that every transaction is recorded transparently, reducing the risks of fraud, money laundering, or financial instability. By integrating blockchain with both CBDC and cryptocurrency transactions, NRB would create a seamless, traceable, and secure digital financial ecosystem.
Furthermore, blockchain's decentralized nature could allow NRB to maintain oversight while still embracing the innovation that cryptocurrencies offer. By using blockchain to manage both the issuance of CBDCs and the purchase of cryptocurrencies, Nepal can enhance security, increase public trust, and foster greater adoption of digital currencies in a legally compliant manner. This approach would enable Nepal to leverage the benefits of blockchain and digital currencies, such as financial inclusion, faster remittances, and economic growth, while ensuring the integrity of its financial system.
Risks and Challenges of CBDC to Regulate Crypto
The legalization of crypto sounds transformative in the field of digital currency and the broader national economy. However, it comes with its own risks and challenges, such as cross-border transactions, fraud, cybersecurity, and more. After legalization, the issue will not remain within national jurisdiction; it will also attract foreign jurisdiction. It can also pose risks to investors and consumer protection. If NRB fails to act cautiously in regulating crypto, it could pose a threat to the entire national economy. Therefore, any move towards the legalization of crypto using CBDC and blockchain must be accompanied by technological safeguards, legal oversight, and an institutional framework to ensure financial security and public trust.
Conclusion
Despite the challenges in legalizing crypto, as the global wave shifts toward digital finance, Nepal is in a unique position—one where it can embrace innovation without sacrificing regulation. Legalizing crypto has its own risks, but it is not impossible to regulate with government agencies. Regulatory adoption by Nepal Rastra Bank would not only provide payment innovation but also open the door to a secure, transparent, and inclusive digital economy, with the assistance of blockchain technology, compliance with anti-money laundering policies, and the fulfillment of KYC requirements. The government should foresee possible market crashes and be prepared for potential economic losses. NRB is not only capable of issuing a reliable digital legal tender but also of constructing a regulatory framework that brings cryptocurrencies into the national financial system in a controlled and traceable manner.
