CBDC, the ‘digital rupee’

Posted By
10Pointer
Categories
Economy
Published
24th Aug, 2022

Context

Reports have said the Reserve Bank of India’s (RBI) digital rupee — the Central Bank Digital Currency (CBDC) — may be introduced in phases beginning with wholesale businesses in the current financial year.

Key-points

In the Budget speech, the Finance Minister had said that the central bank would launch the CBDC in the financial year 2022-23.
It has repeatedly voiced its opposition to private digital currencies, and had proposed to the government to widen the scope of the paper rupee to include currency in a digital form.
RBI had proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a CBDC.
- Government received a proposal from the RBI in October 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form.
- RBI has been examining use cases and working out a phased implementation strategy for introduction of CBDC with little or no disruption.
Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
The government had been planning at the time to introduce a Bill in Parliament that would prohibit all private cryptocurrencies in India with certain exceptions.

About Central Bank Digital Currency (CBDC)

CBDC is a legal tender issued by a central bank in a digital form.

Features of CBDC

High-security instrument: Like paper banknotes, it is a means of payment, a unit of account, and a store of value.
Uniquely identifiable: And like paper currency, each unit is uniquely identifiable to prevent counterfeit.
Liability of central bank: It is a liability of the central bank just as physical currency is.
Transferability: It’s a digital bearer instrument that can be stored, transferred, and transmitted by all kinds of digital payment systems and services.

It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet.
Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralized virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
CBDC is a central bank issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset.

Significance

It will give a big boost to the digital economy and India would be the first major country to officially launch its currency in such a manner.
A digital rupee transaction would be instantaneous as opposed to the current digital payment experience.
More robust, efficient, trusted, regulated and legal tender-based payments option.
More accessible to the people just as UPI made digital cash easier to use.
Reduced dependency on cash.
Reduced settlement risk.
Higher seigniorage due to lower transaction costs.
Usage of the Digital Rupee could also benefit things like cross-border remittances.