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What is RBI central bank digital currency and why is India launching it?

Indian finance minister Nirmala Sitharaman presented the Union Budget for the country on February 1, 2022. In her budget presentation, she announced the launch of a central bank digital currency (CBDC) by 2022–23 as a means to boost India’s economic growth.

If you can’t beat them, copy them. This partially elucidates why central banks in nine countries have introduced their own digital currencies. Recently, in the Union Budget for 2022-23, India draws itself closer towards adopting cryptocurrencies after years of wavering on its stance, as the country seeks to keep up with the global move towards the digital assets.

Besides announcing a flat 30 per cent tax on profits from all virtual currencies such as Bitcoin, Indian Finance Minister, Nirmala Sitharaman talked about the virtual digital space; the launch of a Central Bank Digital Currency (CBDC), or the digital rupee, in the financial year 2022-23. Both the announcements have since become subjects of discussion. While the thing about taxing cryptocurrency profits is on the square, that’s not the case with the digital rupee. We do not know much about it, what it will entail or how it will work in a big market like India.

But what is a digital rupee?

As the name suggests, the Central Bank Digital Currency (CBDC) will be a digital currency issued by the central bank, i.e. the Reserve Bank of India. And it will be based on “Blockchain and other technologies“. [Blockchain is a digitally distributed, decentralised ledger that holds information in blocks.] In simple words, the CBDC will be a digital form of the Indian rupee. Once the RBI starts circulating the digital rupee, commoners could use it just like the regular rupee. The digital rupee could be similar to individual’s NEFT, IMPS or digital wallets. It can even be used to make wholesale transactions or retail payments and can be sent abroad too. Indians could do a lot of things with it.

Why digital despite the presence of the existing rupee?

Well, there are numerous reasons why India stands shoulder to shoulder with the world going digital. One of the main reason is that India doesn’t want to miss out the virtual currency bandwagon. CBDC’s introduction possess the prospects to deliver outstanding benefits, as reduced dependency on cash, higher seigniorage (profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs) due to lower transaction costs, reduced settlement risk. It would possibly lead to more strong, systematic, trusted, regulated and legal tender-based payment options. There are associated risks, no doubt, but they are worth taking against the potential benefits.

Track the global digital world

While interest in CBDCs is near ubiquitous now, very few countries have reached even the pilot stage of launching their CBDCs. A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. To track real time updates, click here.

Central Bank Digital Currencies Status

Credit- Central bank digital currency tracker

Understanding the use cases and business models of CBDC in the context of Indian market

CBDCs can be tools that aid the public policy objectives of the government by providing safe and resilient means of payments. The Reserve Bank of India in its report on currency and finance feature some of the benefits of the CBDC, including the ability to monitor transactions, and the distribution of ‘helicopter money’ as a form of aid during emergencies. It has also stated the potential of CBDCs in targeted distribution of money for particular goods and services as well as for aids and subsidies. Recently, the RBI Deputy Governor also highlighted that CBDC would not only create desirable benefits in payment systems but also protect the general public from the environment of volatile virtual currency.

Apart from these, CBDC also helps in implementing anti-money laundering (AML) and combating financial terrorism (CFT) measures by acting as a highly secure way for cross-border transactions. It can speed up the high-value transactions as no post reconciliation is needed due to the existence of the DLT (Distributed Ledger Technology). It can also benefit many sections of the society by being a tool for offline payments through digital tokens.

Credit- Neha Suryavanshi

Shedding further light

In a research note released post Budget 2022, The State Bank of India made the following observations about CBDC-

Credit- Neha Suryavanshi

So, how will it be different from private virtual currencies like Bitcoin?

A digital rupee will be primarily variant from private cryptocurrencies like Bitcoin and Ethereum because it will be backed by the state and will have its own authorized recognition. The Indian government has called Bitcoin and other cryptocurrencies virtual assets. Which means they will not be legal tender.

Watch | How Indian industry Stakeholders See the Move by Government

Video Credit – Neha Suryavanshi, Harshit Tiwari

Uncovering the disadvantages of the digital rupee

The use of a digital rupee will always leave a money trail. This means the government can track where and how an individual has used the money. This will seed privacy concerns because the financial transactions of the parties involved can be leaked and misused. The issue becomes more considerable when banking sector comes into picture. As digital currency will be directly issued by the RBI to the end-user, which might leave banks with less money to lend.

Is the move hinted at a cashless economy?

According to State Bank of India, the Digital Rupee can have much usage in the real world such as in programmable payments for subsidies and use by financial institutions for faster lending and payments. We could see a pragmatic shift to cashless economy in the near future. This can give impetus to government’s stress on cashless payments and positively impact the banking system. As the usage of the Digital Rupee increases, it could also benefit things like cross-border remittances, an environment could be created for interoperability whereby faster real-time remittance occurs.