By: Sanghamitra Pati
“I see Technology as a means to empower and as a tool that bridges the distance between Hope and Opportunity” - Shri. Narendra Modi
According to the concept note, the Central Bank Digital Currency (CBDC) is the legal tender issued by the Reserve Bank of India. The RBI's CBDC, also known as the Digital Rupee or e-Rupee, is treated as a sovereign currency and is exchangeable one-to-one with fiat currency, according to the regulator.
CBDC is a sovereign currency granted by central banks in conformance with their monetary and fiscal policy. It appears on the central bank's balance sheet as a liability. All citizens, businesses, and government agencies must accept it as a medium of payment, legal currency, and a safe store of value. CBDC can be freely transformed into commercial bank money and cash. CBDC is a fungible legal tender that does not require holders to have a bank account. CBDC is assumed to reduce the cost of money issuance and transactions.
CBDC types that could be introduced:
The Central Bank Digital Currency is divided into two types: general purpose or retail (CBDC-R) and wholesale (CBDC-W) (CBDC-W). Everyone, including the private sector, non-financial consumers, and businesses, can use retail CBDC. Wholesale CBDC is designed for limited availability to a select group of financial institutions.
While retail CBDC is primarily intended for retail transactions, wholesale CBDC is meant for the agreement of interbank transfers and related wholesale transactions.
According to the RBI concept note – “As a direct liability of the central bank, retail CBDC is considered to provide safe and secure money for payment and settlement. Wholesale CBDC has the potential to alter financial transaction settlement systems, making them more efficient and secure. Based on the potential of each, there may be merit in introducing both CBDC-W and CBDC-R.”
What distinguishes Digital Rupee from digital money?
The RBI explained the fundamental difference between CBDC and digital money, saying, “A CBDC would differ from existing digital money available to the public because a CBDC would be a debt of the Reserve Bank, instead of a commercial bank.”
Is Digital Rupee the same as Cryptocurrency???
In accordance with the Atlantic Council, a Washington-based think tank, fewer than a few other countries have institutionalized a digital currency. Jamaica is the most recent country to launch a digital currency, the JAM-DEX, while larger economies such as China and the United States are either testing or anticipate launching their own versions. China has so far tested the digital yuan in 15 provinces as it prepares for a nationwide launch. The country's programme is set to run until 2023. The digital dollar in the United States, on the other side, is still being explored.
Prior to the e-rupee pilot, the RBI made it clear that it is not the same as cryptocurrency, amidst their purely digital existence.
A cryptocurrency is decentralized, meaning it cannot be controlled by any governing authority. The digital rupee, on the other hand, will be issued and controlled by the RBI. Its centralized nature serves as the RBI's bulwark against stressors to the country's financial stability posed by cryptocurrencies.
Why is the RBI instituting CBDC?
CBDC is intended to supplement, rather than substitute, current forms of money, and is designed to provide users with an additional payment avenue, rather than to replace existing payment systems.
The RBI believes that the digital rupee system will strengthen India's digital economy, increase financial inclusion, and boost the effectiveness of the monetary and payment systems.
The following reasons can be considered for India for issuing CBDC:
Cost savings associated with physical cash management.
To advance the cause of computerization in order to achieve a cashless economy.
Championing payment competition, efficiency, and innovation.
Investigating the use of CBDC to improve cross-border transactions.
Encouraging financial inclusion and protecting the common man's trust in the national currency in the face of the proliferation of crypto assets.
When will bank customers be able to use the digital rupee?
The Reserve Bank of India has not yet launched a Digital Rupee pilot for the retail sector. Within a month, the central bank will launch the first Digital Rupee pilot for the retail sector. It will be available to a select group of customers and merchants. The RBI will provide more information in this regard soon.
The Digital Rupee is currently only available to wholesale customers. The use of the Digital Rupee in the wholesale segment, according to the RBI, would enhance the effectiveness of the interbank market. Further to that, settling in central bank money would lower transaction costs and eliminate the need for settlement guarantee infrastructure or collateral to mitigate settlement risk.
Will the Digital Rupee be useful for retail transactions?
CBDCs can be used for retail payments as well. Payment instruments could be made available for CBDC payment transactions. Retail CBDC distributed by the RBI and commercial banks would have to be stored in electronic wallets/accounts by end users," Sharma explains.
Consumer-to-consumer, consumer-to-business, and business-to-business payments would be possible with the Digital Rupee.
Is it the perfect time to digitalize money?
CDBC is one of the most significant financial developments, the full impact of which will be visible in the future. With the rapid adoption of UPI and QR-based payment methods, India already has a spotty record as an early proponent in the field of technology. With CDBC, India is expected to make major strides in the world's rapid adoption of digital currencies.
Well drafted article!
Great insights on digital currency!