In a big boost to India's digital economy, Finance Minister Nirmala Sitharaman announced in her budget speech, that the RBI will soon introduce a digital rupee - using blockchain and other technology in 2022-23. The move comes amid deliberation over the regulation of cryptocurrency.
Central bank digital currencies or CBDCs are legal tender created by the central bank of a nation. The only difference between digital currency and traditional cash is that CBDCs are digital.
But unlike other cryptocurrencies that are DeFi or decentralised financial tokens, CBDCs are backed by the central bank just like all other currencies.
So, the digital rupee is essentially going to be the digital representation of a rupee backed by the Reserve Bank of India (RBI).
Right now, you keep your money in a bank account, where it exists digitally.
But what if some of your funds could live in an account run by the RBI, and you could access it with a digital wallet?
That’s the basic idea behind the digital rupee, and experts hope that it will fix some of the problems in traditional banking.
The operative word is here regulation. The CBDC is a digital form of fiat currency which can be transacted using wallets that are backed by blockchain and can be regulated by the RBI.
Digital money is like the paper rupees that you take out from an ATM. The digital rupee wouldn’t completely replace all paper currencies, so you could still withdraw cash, but a portion of the reserve would be made available digitally.
Though the concept of Central bank digital currencies or CBDCs, was directly inspired by cyptocurrencies like the Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
So, it essentially means that the digital rupee is as good as a physical rupee for all transactions. A digital rupee will have the same value as the physical rupee.
Digital currencies are easy to use, just as the introduction of UPI made digital cash easier to use.
Unlike cryptocurrencies, such as Bitcoin, a digital rupee would be worth exactly that: one rupee. The digital “token” held by the owner is backed and guaranteed by the RBI, so there is no question as to its value.
While normal digital transactions might seem instantaneous, there is a vast web of digital infrastructure underpinning a simple bank or money transfer, requiring multiple exchanges of information between financial services providers. A digital rupee would operate like cash, that is, all the information needed to verify that a transaction has taken place exists within the token stored in a digital wallet. When a payment is made, that information is encoded in the token itself, making that information a permanent element of the token.
A digital rupee could be used around the world, in both cross-border and domestic transactions, which do not require a third party or a bank.
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This essentially means, with wider Internet and smartphone penetration, CBDCs could help bring about massive financial inclusion.
India is not the first nation looking to introduce a digital currency.
China, for example is leading the experiment with the e-Yuan. The e-Yuan or e-CNY is basically China’s answer to the cryptocurrency challenge, and is set for rapid take-off on its expected launch in 2022. It is a centralized, cash-like digital currency that is expected to be primarily used for retail payments in China.
In the United States, the federal reserve is stepping up development of a plan that could result in the issuance of a digitized version of the U.S. dollar.
As world powers rethink how money will be exchanged in the future, India clearly doesn't want to be left behind.
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