Introduction
The concept of money has experienced an evolution from commodity to metallic currency to paper currency to digital currency. Its changing features are defining the new financial landscape of the economy and with the advent of cutting-edge technologies, the digitalization of money is the next milestone in monetary history. Advancement in technology has made it possible for the development of a new form of money, viz. Central Bank Digital Currencies (CBDCs).
Reserve Bank of India also known as the Central Bank plays a pivotal role in the Indian financial system, it is an important pillar of the financial ecosystem. Fundamentally, it has always provided quick, seamless, efficient, and stable solutions for the economy. These quick and seamless solutions include payment systems and the issue of currency. Recent developments in technology made it possible for India, as a nation, to make significant progress towards innovation in digital payments.
India has made a lot of progress towards innovation in digital payments, which can be clearly seen by the enactment of a separate law for Payment and Settlement Systems which has further enabled an orderly development in the payment eco-system in the country. Having payment options that are safe, secure, efficient, accessible, affordable, convenient, and available 24x7x365 days a year is a matter of great pride for India.
Central Bank Digital Currency in India
Reserve Bank of India defines CBDC (Digital Rupee (e₹)) as the legal tender issued by a central bank in a digital form. It is akin to sovereign paper currency but takes a different form, which shall be exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender, and a safe store of value.
The Government of India announced the launch of CBDC from FY 2022-23 onwards in the Union Budget placed in the Parliament on February 01, 2022.
With already introducing the first pilot in the Digital Rupee - wholesale segment (e₹-W) on November 1, 2022, the Reserve Bank has announced the launch of the first pilot for retail digital Rupee (e₹-R) on December 01, 2022, thereby making India one of the front-runners in digital payment domain, as most of the major economies have not introduced the CBDC yet.
CBDC is a digital or virtual currency, yet it is not comparable to the private virtual currencies which have mushroomed over the last decade. Private virtual currencies sit at substantial odds to the historical concept of money, they are not commodities or claims on commodities as they have no intrinsic value.
Relevance of CBDC for India
The introduction of CBDC cryptocurrency in India is expected to offer a range of benefits, such as reduced dependency on cash, lesser overall currency management cost, and reduced settlement risk. It could provide the general public and businesses with a convenient, electronic form of central bank money with safety and liquidity and provide entrepreneurs with a platform to create new products and services. Introducing CBDC in India would result in a more robust, efficient, trusted, regulated, and legal tender-based payment option (including cross-border payments).
However, the implementation of CBDC could also pose certain risks that may have a bearing on important public policy issues, such as risks to financial stability, monetary policy, financial market structure, and the cost and availability of credit. They need to be carefully evaluated against the potential benefits.
The features of CBDC include:
Benefits of CBDC in India
The opportunities in CBDC in India are as follows:
Key Reasons for Issuance of CBDC
Union Minister for Finance and Corporate Affairs, Ms. Nirmala Sitharaman, while presenting the Union Budget for 2022-23, in the parliament elaborated that introduction of Central Bank Digital Currency (CBDC) would give a big boost to a digital economy. She asserted that digital currency will also lead to a more efficient and cheaper currency management system.
The key reasons for the issuance of CBDC include:
Different jurisdictions have justified the adoption of digital currency for extremely diverse reasons, which are as follows:
The Road Ahead
The scope of CBDC in India is such that it will have a significant impact on the Indian Economy in general and the banking sector in particular. The Digital Rupee issued by RBI shall form a part of the overall money supply in the economy which will impact the demand and prices, the velocity of circulation of currency would undergo a change, and the overall cost of transaction is expected to decrease, thereby bringing in efficiency.
Furthermore, it could significantly improve the monetary policy development in India, its real-time situational monitoring and enhanced surveillance enabled by the central bank digital currencies can go a long way in stimulating these processes.
There is still quite a lot of ambiguity in the regulatory environment for private virtual currencies or cryptocurrencies. Having a sound regulatory system with respect to private virtual currencies can surely be a step forward in the Indian economy wherein these private virtual currencies can co-exist with a sovereign digital currency.