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Dikshu C. Kukreja
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Mr. V. Raman Kumar
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Ms. Chandra Ganjoo
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Sanjay Bhatia
Sanjay Bhatia
Aprameya Radhakrishna
Aprameya Radhakrishna
Colin Shah
Colin Shah
Shri P.R. Aqeel Ahmed
Shri P.R. Aqeel Ahmed
Dr. Vidya Yeravdekar
Dr. Vidya Yeravdekar
Alok Kirloskar
Alok Kirloskar
Pragati Khare
Pragati Khare
Devang Mody
Devang Mody
Vinay Kalantri
Vinay Kalantri

RBI’s Digital Currency and its Significance

RBI’s Digital Currency and its Significance

What is a Digital Currency?

The term ‘digital currency’ refers to money exclusively available in digital or electronic form. It is also known as cyber cash, digital money, electronic money, or electronic currency. Electronic wallets or computers connected to the internet or specified networks conduct digital currency transactions. Typically, digital currencies do not require intermediaries and it is frequently the most cost-effective way to trade currencies. Not all digital currencies are cryptocurrencies, and not all cryptocurrencies are digital currencies. Digital currencies have the ability to transfer value seamlessly and reduce transaction costs. India’s official digital currency is in the works and would be launched by 2022–23, according to the Reserve Bank of India (RBI).

Central Bank Digital Currency

A Central Bank Digital Currency (CBDC) is a digital form of a legal tender issued by the central bank. It is equivalent to fiat cash and may be exchanged one-to-one but in a different form. A sovereign currency in electronic form will appear on the central bank’s balance sheet as a liability (currency in circulation). It should be possible to exchange CBDCs for cash. Central banks worldwide are promoting digital currencies for various reasons including to popularise usage of electronic money and thwart the emergence of private digital assets such as cryptocurrencies. According to a poll by the Bank for International Settlements (BIS) in 2021, 86% of central banks were actively researching possibilities for CBDCs, 60% were experimenting with the technology and 14% were conducting trial projects. More than 91 countries, representing over 90% of the world’s GDP, have their own centralised digital currency in works. India is in the development stage of its digital currency.

India’s own official digital currency is expected to emerge in early 2023 and will be similar to any of the already available private company-operated electronic wallets, with the exception that it will be a sovereign-backed facility. Ms. Nirmala Sitharaman, Minister of Finance and Corporate Affairs, mentioned in her 2022–23 budget speech that a central bank-backed 'digital rupee' would be launched soon. The RBI has made public its proposal to adopt digital currency in stages. Mr. T. Rabi Sankar, Deputy Governor of RBI, stated in December that the wholesale component of the CBDC had made significant progress, while the retail component would take longer. The digital rupee will be based on blockchain technology, which will reduce the cost of currency maintenance and allow the government to manufacture fewer notes. The currency will be digital; its lifespan is extended because digital forms cannot be destroyed or lost.

Difference between a CBDC and Digital Asset

CBDC (Digital Currency)

Cryptocurrency

The electronic form of fiat money used in contactless transactions is called a digital currency.

Cryptocurrency is a store of value that is protected by encryption.

A central body oversees the digital currency (RBI for India).

Cryptocurrency is uncontrolled and decentralised.

The value of digital currencies is stable, as they are accepted worldwide.

The value of cryptocurrencies is highly volatile, and digital coins are not yet generally recognised.

Only the sender, receiver, and bank are aware of digital currency transactions.

On a decentralised ledger, cryptocurrency transactions are made public.

Strong passwords are required to protect digital wallets, banking apps, credit cards and debit cards.

Encryption protects cryptocurrencies.

Significance of Digital Currency

  • A safer form of money: CBDCs, such as paper currency, are direct liabilities of the central bank, making them a safer form of digital money. This can be compared to a situation in which every person has a checking account with the central bank.
  • End to paper cash: The central bank will be the custodian of everyone’s cash and the clearer of all transactions, and there will be no need for conversion of paper money into digital money because a CBDC unit is a direct central bank liability that is precisely equivalent to paper money rather than merely convertible into it, rendering paper cash obsolete. People will no longer require cash outlets and will have fewer options for depositing cash and other valuables.
  • Easier policy implementation and regulation: In a CBDC environment, all transactions can theoretically be monitored using data analytics and AI to quickly identify banks that are failing or participating in questionable transactions. It becomes much easier for authorities to identify the parties to a transaction in a CBDC world where digital bank codes are visible to the clearing institution, which largely simplifies the detection of criminal activity and eliminates black markets that deal primarily in physical money.
  • Increased diversity: CBDC transactions do not require a bank account, which is crucial in developing countries where a third of the population lacks access to traditional finance but has mobile internet access. With an Aadhar number and a smartphone, an unbanked Indian customer can easily transact using a mobile app. This means that governments in the industrialised world will quickly incorporate those who had previously been excluded from the financial system.
  • Cost of currency management: Based on the market estimate, the cost of each Rs 100 (US$ 1.33) note in its four-year life cycle is 15–17% on each tender of Rs 15–17 (US$ 0.2–0.23). The cycle comprises a series of new notes being printed, and soiled notes being returned to the RBI via commercial banks. The cost reductions from a digital currency might be significant, given that bigger denomination notes are being phased out and people start switching to digital rupee instead of paper-based currency.
  • Overcoming international differences: CBDCs could help payment systems become more real-time and cost-effectively globalised. An Indian importer can pay an American exporter in digital dollars in real-time without an intermediary. This transaction would be complete, just like handing over cash in dollars, and it would not even require the US Federal Reserve system to be open for settlement. Currency settlements would no longer be affected by time zone differences.

A Step Towards a Cashless Economy

Faced with diminishing paper currency usage, central banks try to popularise a more acceptable electronic form of currency. They are attempting to accommodate the public’s need for digital currencies, as evidenced by the growing use of private virtual currencies, while also avoiding the more harmful repercussions of such private currencies. CBDCs can offer users advantages such as liquidity, scalability, acceptance, transaction convenience, anonymity, and speedier settlement. With the government’s support infrastructure, CBDC adoption will improve and make it easier for individuals to utilise, much as UPI made it easier to use digital currency.

In the real world, the digital rupee can be used for programmable payments for subsidies and by financial institutions for faster lending and payments. There can be a pragmatic shift to a cashless economy in the near future. This might encourage the government's push for cashless payments and positively impact the banking sector. As the digital rupee grows, it may improve things such as cross-border remittances. An environment for interoperability may be built, and lead to a cashless economy.

 

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