The Reserve Bank of India (RBI) announced on Monday that from 1 November 2022 it will begin pilot launch of the digital rupee for specific use cases. According to the notification, the first digital rupee pilot began in the wholesale segment on Tuesday. The pilot has been rolled out through nine banks—State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC. RBI had proposed to the government in October last year to broaden the scope of the paper rupee to include digital currency.
Union finance minister (FM) Nirmala Sitharaman had earlier announced that RBI will launch a central bank digital currency (CBDC) in 2022-23, which is the first official statement from the Union government on the much-anticipated digital currency's launch. According to the FM, the introduction of CBDC will boost the digital economy and will be based on blockchain technology.
What Is CBDC?
RBI defines Central Bank Digital Currency (CBDC) as a digital form of legal tender issued by a central bank. Simply put, it is a digital form of fiat currency, i.e., The Indian Rupee. As a result, it can be exchanged for fiat currency one for one.
As per RBI, “CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.” The currency will be exchanged through blockchain-based wallets. It will also be exchangeable with government-issued money. CBDC offers an alternative to western payment systems.
What Is Blockchain Technology?
A blockchain is a system of recording data that is almost impossible to change, hack or cheat. It is a digital ledger of transactions that is copied and distributed to the entire network of devices on the blockchain. In simple words, the technology helps store and transact digital currency. As it is difficult to tamper with, it is also one of the safest ways to exchange currency digitally.
Why Is RBI Introducing CBDC?
CBDC is aimed to complement, rather than replace, current forms of money and is envisaged to provide an additional payment avenue to users, not to replace the existing payment systems.
RBI believes that the digital rupee system will "bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient.” Pointing out the motivations for India to consider issuing CBDC, RBI mentioned these reasons:
a) Reduction in cost associated with physical cash management;
b) To further the cause of digitisation to achieve a less cash economy;
c) Supporting competition, efficiency and innovation in payments;
d) To explore the use of CBDC for improvement in cross-border transactions;
e) Support financial inclusion;
f) Safeguard the trust of the common man in the common man in the national currency vis-a-vis proliferation of crypto assets.
Features of Digital Rupee
1. CBDC is a sovereign currency issued by central banks in alignment with their monetary policy.
2. It appears as a liability on the central bank’s balance sheet.
3. It must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
4. CBDC is freely convertible against commercial bank money and cash.
5. CBDC is a fungible legal tender for which holders need not have a bank account.
6. CBDC is expected to lower the cost of issuance of money and transactions.
How Is Digital Rupee Different from Money in Digital Form?
Explaining the difference between CBDC and money in digital form, RBI said, "A CBDC would differ from existing digital money available to the public because a CBDC would be a liability of the Reserve Bank, and not of a commercial bank."
CBDC Can Be Classified into Two Types
1) Retail (CBDC-R): Retail CBDC would be potentially available for use by all;
2) Wholesale (CBDC-W) is designed for restricted access to select financial institutions.
Digital Rupee vs Cryptocurrency
CBDC will have all of the advantages that we see with cryptocurrencies and digital forms of payment. To begin with, a digital currency can never be torn, burned, or physically damaged. They are also not physically lost. In comparison to notes, the lifeline of a digital form of currency will, thus be infinite.
Difference between Digital Rupee and Cryptocurrency
A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology. However, it has been controversial due to its decentralised nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities. On the contrary, CBDC issued by RBI will be a legal tender in a digital form.
The digital rupee will be different from Bitcoin, Ethereum and other cryptocurrencies in the sense it will be backed by the government. Secondly, having an intrinsic value on account of government backing, the digital rupee will be equivalent to holding a physical rupee equivalent.
Benefits of Digital Rupee
Apart from reducing the transaction cost, having a digitised currency will make it easier for governments to access all transactions happening within the authorised networks. It will become impossible to avoid the gaze of the government, thus subjecting every transaction to relevant laws within the country. Hence, the government will have better control over how money leaves and enters the country, which would allow them to create a space for better budgeting and economic plans for the future and overall a much safer environment.
RBI has been exploring the pros and cons of a central bank digital currency for some time and is working towards a strategy to implement it in a phased manner, it said earlier this month.