Context

• The Union Finance Minister has announced the launch of the Digital Rupee — a central bank digital currency (CBDC) — 2022-23 onwards.

About Digital Rupee

• The Reserve Bank of India will launch the CBDC from the upcoming financial year.
• This follows the government’s plans to launch the CBDC that will be backed by blockchain technology.

What is a CBDC?

• CBDC is a legal tender issued by a central bank in a digital form.
• It is similar to a fiat currency issued in paper and is interchangeable with any other fiat currency.

  

• One chief difference will be that a Digital Rupee transaction will be instantaneous as opposed to the current digital payment experience.

Features of CBDC

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

Need for CBDC

• India is a leader in digital payments, but cash remains dominant for small-value transactions.
• India has a fairly high currency-to-GDP ratio.
• An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.

Key benefits offered

• CBDC can definitely increase the transmission of money from central banks to commercial banks and end customers much faster than the present system.
• Specific use cases, like financial inclusion, can also be covered by CBDC that can benefit millions of citizens who need money and are currently unbanked or banked with limited banking services
• The move to bring out a CBDC could significantly improve monetary policy development in India.
• In the cross-border payments domain, India can take a lead by leveraging digital Rupee especially in countries such as Bhutan, Saudia Arabia and Singapore where NPCI has existing arrangements.

Digital Rupee different from Bitcoin

• It was earlier not known how India’s own virtual currency will shape up. The new budget has shed some light on the same, confirming the use of blockchain and other technologies for its use in the country. While this was earlier considered to be a difference between Digital Rupee and Bitcoin, there is now little left to differentiate between the two.
• Blockchain technology, by nature, is decentralised, meaning that all its information is stored across a network of computers. This brings increased resilience to the data against errors as well as cyber threats. For cryptocurrencies like Bitcoin, this network is spread globally across the systems of its developers.
• Digital Rupee will have a slightly different version of this. Since the currency will be regulated by the RBI, it will not be truly decentralised in nature. Meaning there is, in fact, one entity controlling its issuance and distribution, just the opposite of what decentralised would mean in a true sense.
• The “decentralised” adjective, thus, only stands true for blockchain technology and its network of computers in the case of the Digital Rupee. RBI will have to set up this network going forward, but the blockchain network will be limited to the bank and the associated entities. As a report by PWC highlights, CBDC may need “an underlying system for issuance and distribution to the public” and for this, the RBI may have to include public and private banks, payment service providers (PSPs) and operators on the network.
• A wider ecosystem would then entail the involvement of other financial institutions and third-party service providers. So, even though the Digital Rupee will follow the issuance models of the physical currency, a setup needs to be in place for it.

Source: TH & Economic Times

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