All you need to know about Digital Rupee or Central Bank Digital Currency (CBDC)

Prabhat Nigam

08 Mar, 2022

The Union Minister of Finance in the budget of 2022-23 made one of the expected announcements of India’s own digital rupee or Central Bank Digital Currency (CBDC) being launched by the Reserve Bank of India (RBI). This digital rupee shall be RBI’s CBDC. The finance minister explained the importance of the CBDC in boosting the digital economy of the country. This piece of information talks about different aspects of CBDC.

What is meant by ‘Central Bank Digital Currency’ (CBDC)?

Central Bank Digital Currency (CBDC) is the new legal tender to be issued by the Reserve Bank of India. This will be the new digital currency which shall be backed by blockchain technology or any other technology. This CBDC can be said to be an electronic record or digital token for India’s official currency. This CBDC is capable of being used as a store of value, as unit of account, medium of exchange and a standard of deferred payment.

According to RBI, there is no difference between the currency issued in the paper format by the central bank and this CBDC except for the fact this takes a different form than paper. The CBDC will be a sovereign currency in an electronic form which will appear as currency in circulation in the Central Bank’s balance sheet. The CBDC would be exchangeable at par with cash.

Need for the adoption of CBDC 

The adoption of CBDC can be justified for the following reasons:

1. Central bank took into consideration the public’s need for digital currencies which was manifested in purchasing of private virtual currencies which could have been damaging for the economy. Therefore, to avoid such damaging consequences of private virtual currency on the Indian economy, CBDC will be adopted.
2. CBDC helps in issuing of currency more efficiently compared to physical cash transactions.
3. As people are shifting to digital payments and do not want to make physical payments, central bank thought it is wise to popularise a more acceptable form of currency.

Advantages of CBDC over other digital payment mechanisms 

RBI considers that Digital Rupee has the following advantages over other means of digital payment mechanisms:

• Since payments made using CBDC are final, the risk of settlement of payments in the financial system is considerably reduced.
• The Digital Rupee also has the capacity to bypass interbank settlement system. It is similar to a UPI system where this new currency will be transacted instead of bank balances.
• CBDC can help the users with the access to liquidity, can ease their transaction process maintaining anonymity at the same time, can help them to scale their undertaking, acceptance and faster settlement of transactions.

If the government gets successful in providing supporting infrastructure, then the people will be able to adopt Central Bank Digital Currency easily and gain better access to it. This move of the government will make accessibility of digital currencies easier in a similar way as Unified Payment Interface (UPI) made use of digital cash easier.   

Means of Globalizing payment systems 

It is believed that the DBDC will help in building a more globalized payment settlement systems and eliminating the need of statutory authorities to settle the payments made globally. Payments made using Central Bank Digital Currency will enter the realm of real-time payment systems which will be cost effective while making payments across borders. There will be no requirement of an intermediary for settling the transactions made across borders. The payments will be settled in real-time. The transactions made would be final as if payment has been directly made to the person across the border. This system has the potential to eliminate the matter of difference in time zones in settlement of payments.

How do users get benefited from CBDC 

RBI has announced only the aspect of introducing the Central Bank Digital Currency but no formal announcement has come out telling citizens how CBDC will be actually transacted by the citizens. Some experts have proposed the manner in which Digital Rupee must be transacted but nothing concrete has come in this direction from RBI’s end.

The benefit that the users will accrue is the real time settlement of the transactions made using Central Bank Digital Currency and not in a manner current digital payment experience takes place.

Move in the direction of a cashless economy 

Experts have said that the move of the government to introduce Central Bank Digital Currency has much required usage in the real world where the government can use Digital Rupee in a programmable manner for disbursal of subsidies, facilitating financial institutions in faster lending and making payments. This can be a watershed moment in moving towards a cashless economy in the near future. As the infrastructure improves for such a transaction, one can witness more cross border transactions taking place on real-time basis. Interoperability increases and remittances will also increase.

Conclusion

The budget of 2022-23 has reflected the intention of the government on virtual digital currencies and other private digital currencies and its treatment in terms of taxes imposed on them. The RBI^[1] always had well founded apprehensions that the private digital currencies were being used for the purpose of money laundering, terror financing, evasion of taxes. Therefore, the government felt the need of introducing its own Central Bank Digital Currency for its users.

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