Central Banks Digital Currency or digital rupee has been in news for months. Now finally, Union Finance Minister Nirmala Sitharaman has announced the launch of Digital Rupee in Budget 2022. RBI will launch this digital currency at the beginning of the new financial year. The Digital Rupee, or CBDC, is being considered a quantum leap for the digital economy. Also, India will become the first major economy to officially launch its own digital currency.
In such a situation, let’s understand all about it in detail:
What is it?
Reserve Bank of India will launch CBDC in the new financial year. The new currency will be based on blockchain technology. A CBDC issued by RBI in digital form will be a legal tender. CBDC will be equivalent to currency issued by a central bank, but you will not be able to touch it physically. On other matters, it will serve the same purpose as a rupee. So, CBDC can be exchanged with notes.
Will it be different from Cryptocurrencies?
CBDC is not a cryptocurrency. The CBDC of the Reserve Bank of India will be a legal tender. It will be issued by RBI, so there will be no risk of crashing, unlike existing cryptocurrencies. This RBI backed virtual currency will be completely different from existing ones like Bitcoin or Ethereum. Besides, private Cryptocurrencies are not backed by an equivalent asset, but CBDC will be backed by some equivalent physical asset like gold.
How will this be different from existing digital payments?
Well, here CBDC will have an edge over digital payments done through your bank accounts. In this, there is no need for interbank settlement. With this, payment transactions will be done in more real-time and at less cost. Indian importers will be able to pay in real-time to overseas exporters without any middlemen.
What are the legal bottlenecks?
Even though RBI is ready to launch it. But the CBDC will not be launched until the bill on cryptocurrencies is passed in Parliament. Because the existing provisions under the RBI Act have been made keeping the physical currency in mind. Further, more amendments will be required to the Coinage Act, the Foreign Exchange Management Act (FEMA) and the Information Technology Act.
How this will affect the banking system?
With the introduction of CBDC, the transaction demand for bank deposits will reduce. Also, the settlement risk will be lowered further. Being risk-free, CBDC will reduce bank deposits. Moreover, the responsibility of the government to guarantee bank deposits will be lighter.
Do any other countries have the same digital currency?
Till the end of last year, More than 85 countries, accounting for more than 90% of global GDP, were studying CBDCs and gathering information. Of these, 35 countries were considering a project to introduce a CBDC in May 2020. Of these, 9 countries have already launched CBDCs in full swing. These include the Bahamas, 7 Eastern Caribbean and Nigeria. Nigeria has also recently launched its CBDC e-naira outside the Caribbean. However, no major countries, like members of the G-7 or OECD, have launched digital currency.
Significance in common people’s lives
With the introduction of digital currency, the cost of transactions for common people and businesses will be reduced. The World Bank estimates that for now sending money to other countries one has to pay a fee of more than 7%, while with the introduction of digital currency it will come down to 2%.