RBI must proceed cautiously with the Digital Rupee

Contact Counsellor

Last Updated04/02/2022

Finance Minister Nirmala Sitharaman on Tuesday announced the launch of the Digital Rupee — a central bank digital currency (CBDC) — 2022-23 onwards.
It was announced following the reports of central bank officials informing the central board of the RBI of a pilot project for the introduction of a Central Bank Digital Currency (CBDC).
This follows the government’s plans to launch the CBDC that will be backed by blockchain technology.

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.
The goal of CBDC is to provide users with convenience and security of digital as well as the regulated, reserve-backed circulation of the traditional banking system.

Till October 2021, only five have fully launched them: the Bahamas, Grenada, Saint Kitts and Nevis, Antigua and Barbuda, and Saint Lucia.
Countries like Japan, China, Singapore, Sweden are currently examining the various facets of such a transition.
Recently, the US Federal Reserve also released a report outlining the costs and benefits of issuing a central bank backed digital dollar.

The stategy to adopt CDBC by several countries has been on the rise as the governments are not quite able to control the immense popularity of Bitcoins and other cryptocurrencies.
If this goes on for the next few years, the traditional banking system is bound to collapse.
People might soon give up on the conventional banking system and turn to cryptocurrencies in large numbers.
Hence, central banks of different countries across the globe are in the process of adopting the Central Bank Digital Currency.
The CBDCs are not going to be like cryptocurrencies with a high volatility rate, but it will be just the digital version of fiat currency, so, therefore, it will be backed by a considerable amount of monetary reserves like tangible assets or currency reserves.

Each unit of CBDC will act as digital money, which can be used for payments; it can also be stored.
It will also carry a unique serial number just like paper notes so that each CBDC unit can be distinct from other Cbcd units to avoid fraud.
It will be a part of the money supply, so CBDC can be used along with normal currency and will be heavily regulated by the Government.
Central Bank Digital Currency is an attempt to bring out the pros of both fiat currency and cryptocurrencies.

The idea for central bank digital currencies owes its origins to the introduction of cryptocurrencies which are digital currencies secured by cryptography.
This makes them hard to duplicate or counterfeit.
They are decentralized networks that are based on blockchain technology.
The invention of a secure and immutable ledger allows transactions to be tracked.
It also enables seamless and direct transfers, without intermediaries and between recipients simplifies the implementation of monetary policy in an economy.
The cryptocurrency ecosystem also provides a glimpse of an alternate currency system in which cumbersome regulation does not dictate the terms of each transaction.
Established in 2009, Bitcoin is one of the world's most popular cryptocurrencies.
No physical coins actually trade hands. Instead, transactions are traded and recorded on a public, encrypted ledger, which can be accessed by anyone.
The process of mining allows all transactions to be verified.
Though the current cryptocurrency ecosystem does not pose a threat to the existing financial infrastructure, it has the potential to disrupt and simplify the existing system.
Some experts believe the moves by central banks to design and develop their own digital currencies will act as a measure to pre-empt such an eventuality.

There are several models proposed by technology experts and evangelists on how the Digital Rupee could be transacted but a formal announcement by the Reserve Bank of India will likely detail how the Digital Rupee will be transacted by citizens.
One chief difference will be that a Digital Rupee transaction will be instantaneous as opposed to the current digital payment experience.

Several economists have pointed out that while some benefits may accrue at the wholesale level, the real transformation, and the challenge as well, lies at the retail level.
Considering the wider economic implications, the central bank must carefully weigh the pros and cons.
It must proceed cautiously, remaining mindful of the various issues, the design considerations and the implications surrounding the introduction of the digital currency.