Context
- According to reports, the Reserve Bank of India’s (RBI) digital rupee — the Central Bank Digital Currency (CBDC) — could be introduced in stages, starting with wholesale businesses in the current fiscal year.
- Finance Minister Nirmala Sitharaman stated in her Budget speech on February 1 that the CBDC would be launched in fiscal year 2022-23. The Reserve Bank of India (RBI), which has repeatedly expressed its opposition to private digital currencies, proposed to the government in October last year to broaden the scope of the paper rupee to include digital currency.
Relevance
GS Paper: 3- Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.
Mains Question
What is Central Bank Digital Currency (CBDC)? What will the introduction of the digital rupee change for citizens? (150 Words)
Central Bank Digital Currency (CBDC)
- According to the RBI, “CBDC is digital legal tender issued by a central bank.” It is the same as fiat currency and can be exchanged one for one with it; the only difference is its form.” CBDC, or digital fiat currency, can be transacted using blockchain-backed wallets.
- Despite the fact that the concept of CBDCs was directly inspired by Bitcoin, it differs from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the status of ‘legal tender.’
- CBDCs allow users to conduct domestic and cross-border transactions without the involvement of a third party or a bank.
How will CBDC help?
- CBDC has the potential to provide significant benefits such as decreased reliance on cash, increased seigniorage due to lower transaction costs, and reduced settlement risk.
- CBDC implementation could also result in a more robust, efficient, trusted, regulated, and legal tender-based payment option.
- There are also risks that must be carefully weighed against the potential benefits.
- The RBI proposed amendments to the Reserve Bank of India Act, 1934, that would allow it to establish a CBDC.
- The government had planned to introduce a Bill in Parliament at the time that would prohibit “all private cryptocurrencies in India,” with “certain exceptions.”
- In October 2021, the government received a proposal from the Reserve Bank of India to amend the Reserve Bank of India Act, 1934 to broaden the definition of “bank note” to include currency in digital form.
- The RBI has been investigating use cases and developing a phased implementation strategy for the introduction of CBDC with minimal or no disruption.
- The RBI has repeatedly expressed concerns about private cryptocurrencies such as Bitcoin, Ether, and others being used for money laundering, terror financing, and tax evasion.
- Introducing its own CBDC has been viewed as a means of bridging the benefits and risks of digital currency.
What implications will the introduction of the digital rupee have for citizens?
- Several models have been proposed by technology experts and evangelists for how the digital rupee could be transacted, and the formal announcement by the RBI will most likely provide details.
- One significant difference could be that a digital rupee transaction, as opposed to the current digital payment experience, would be instantaneous.
