Digital Currency in India
Digital currency refers to a type of currency that exists in digital form, rather than as physical notes or coins. It is stored on technology-based platforms, such as a mobile device, and replaces traditional paper currency.
The Reserve Bank of India (RBI) is launching the Digital Rupee (e₹), a digital representation of the Indian Rupee, as a central bank digital currency (CBDC). The launch of the e₹, which was first proposed in 2017, is expected to occur in the 2022-23 financial year and will utilize blockchain technology. The Digital Rupee will be regulated by the central bank and its liability will lie with the RBI. Both financial institutions and the general public will have access to the e₹ through two distinct versions: the wholesale version (e₹-W) for interbank settlements, and the retail version (e₹-R) for consumer and business transactions. The implementation of the Digital Rupee is aimed at reducing the cost of printing physical currency, which was estimated to be ₹49,848,000,000 in 2017.
What is CBDC?
A digital currency issued by a central bank, called a central bank digital currency (CBDC), is a liability of the central bank and is denominated in the sovereign currency. Unlike traditional banknotes and coins, CBDCs are electronic and can be used by households and businesses for transactions. While inspired by cryptocurrencies like Bitcoin, CBDCs differ in that they are issued by states and do not require a blockchain or distributed ledger.
Central banks worldwide are exploring the possibility of launching their own CBDCs, with more than 80 central banks currently evaluating digital currencies, according to ECB's chief Christine Lagarde. China's digital RMB was the first digital currency to be issued by a major economy, and as of January 2023, five central banks have launched their own CBDCs: the Central Bank of The Bahamas (Sand Dollar), the Eastern Caribbean Central Bank (DCash), the Central Bank of Nigeria (e-Naira), the Bank of Jamaica (JamDex), and the Reserve Bank of India (Digital Rupee).
Some states have also considered issuing cryptocurrencies, such as Venezuela's Petro and the Marshall Islands' Sovereign, with the goal of increasing their independence from global financial systems and reducing their dependence on foreign currencies or evading international sanctions.
The Reserve Bank of India (RBI) has defined a central bank digital currency (CBDC), like the Digital Rupee, as a digital form of legal tender issued by a central bank, and fully exchangeable with traditional fiat currency. This distinguishes CBDCs from cryptocurrencies, which are not considered money or currency and have no central issuer. The Digital Rupee, as a CBDC, will be governed and managed by the central bank, and be considered a legal tender, available for use by all citizens of India through digital wallets, NEFT, and IMPS, among other platforms. In contrast, cryptocurrencies are decentralized assets without a central issuer.
Potential Advantages of Digital Rupee
Governments and central banks are currently exploring central bank digital currencies (CBDCs) due to their potential benefits for financial inclusion, economic growth, technology innovation, and transaction efficiencies.
CBDCs could allow for direct, real-time payments between payers and payees without the need for intermediaries like banks or clearing houses. This could reduce payment risk and complexity, eliminate transaction fees, and provide a secure and efficient means of transaction.
CBDCs could also improve financial inclusion by offering low-cost or free basic bank accounts, prevent illicit activity, facilitate tax collection, combat crime, and serve as proof of transaction.
Additionally, CBDCs could help protect the money supply as a public utility and preserve seigniorage income for governments. They could also boost competition between banks, offer a new channel for monetary policy transmission, and provide an alternative to fractional reserve banking for those seeking financial safety.
Downside of Digital Currencies
Below are some potential drawbacks associated with digital currencies:
Fragmentation: With so many different digital currencies being created, it can be difficult to determine which ones are appropriate to use in certain situations. Furthermore, some digital currencies may not be designed to scale for mass adoption, which could limit their usefulness.
Costly transactions: The use of blockchain technology to validate and record transactions can be costly in terms of the amount of electricity required. This can make transactions more expensive, particularly for smaller transactions.
Steep learning curve: Digital currencies can be difficult for new users to understand and use, particularly when it comes to tasks like opening a digital wallet and securely storing digital assets. Simplifying the system could help increase adoption.
Cybersecurity issues: The security of digital currencies is a concern for many users, as they are vulnerable to cyberattacks and virtual theft. This can make it difficult for people to trust and adopt digital currencies.
The Digital Rupee is highly promising to all dimensions of Indian society, as we just saw. The RBI aims to resolve issues related to traditional physical currencies and cross-border transactions through the introduction of the digital rupee. Currently, the process of transferring money across borders and converting it into foreign currencies can be time-consuming and expensive. However, with the digital rupee, this process will become more efficient, enabling banks to manage cash and operations with greater ease.
In India, managing and tracking physical cash can be a daunting task, but the CBDC can help address anonymity in a non-intrusive manner and potentially reduce the demand for cash. Furthermore, by launching the digital rupee, the government can save money on operational, printing, distribution, and storage costs, thus aligning with its goal of transitioning towards a cashless economy.