RBI’s Central Bank Digital Currency (CBDC)
Recently The Reserve Bank of India (RBI) announced that it will begin piloting the digital rupee for specific use cases on November 1, 2022. According to the notification, The first digital rupee pilot began in the wholesale segment on Tuesday.
State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC are among the nine banks participating in the pilot.
Here’s a snippet of the official announcement by the RBI
The idea of “Central Bank Digital Currencies” (CBDC) is not a recent development. Some attribute the origins of CBDCs to Nobel laureate James Tobin, an American economist, who in the 1980s suggested that Federal Reserve Banks in the United States could make available to the public a widely accessible ‘medium with the convenience of deposits and the safety of currency.’ It is only in the last decade, however, that the concept of digital currency has been widely discussed by central banks, economists & governments.
Below is a picture of the current nationalities in the run of introducing CBDC
What is CBDC?
CBDC is defined by the RBI as a legal tender issued by a central bank in a digital form. It is analogous to paper currency but takes a digital form. The RBI states that it will be exchangeable at par with the existing currency and will be accepted as a medium of payment and legal tender.
CBDC Can Be Classified Into Two Types
The RBI has stated in the Concept Note that there are 2 (two) forms of CBDC which may be introduced:
- a CBDC which is retail-oriented, which would be available to everyone for general retail transactions; and
- a CBDC which is wholesale oriented, which would be usable only by select financial institutions intended for interbank settlement of transfers.
The Goal Of CBDC:
The main goals of CBDCs are 5 fold. It is made with the vision to provide businesses and consumers with — Privacy, Transferability, Convenience, accessibility, and Financial Security. CBDCs could also decrease the cost of maintaining a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money transfer methods with lower-cost options.
RBI believes that the digital rupee system will “bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient.” Pointing out the motivations for India to consider issuing CBDC, RBI mentioned these reasons:
- Reduction in cost associated with physical cash management;
- To further the cause of digitisation to achieve a less cash economy;
- Supporting competition, efficiency and innovation in payments;
- To explore the use of CBDC for improvement in cross-border transactions;
- Support financial inclusion;
- Safeguard the trust of the common man in the national currency vis-a-vis the proliferation of crypto assets.
Features of Digital Rupee
- CBDC is a sovereign currency issued by central banks in alignment with their monetary policy.
- It appears as a liability on the central bank’s balance sheet.
- It must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
- CBDC is freely convertible against commercial bank money and cash.
- CBDC is a fungible legal tender for which holders need not have a bank account.
- CBDC is expected to lower the cost of issuance of money and transactions
The Digital Rupee will assist RBI in attaining financial inclusion, transitioning to a cashless society, and lowering the cost of producing and managing currency, among other things. As a result, establishing a Digital Rupee is required since it will empower citizens and enable them to build the digital economy, effectively ending the present banking system.
RBI has been exploring the pros and cons of a central bank digital currency for some time and is working towards a strategy to implement it in a phased manner.
Frequently Asked Questions:
– Will Digital Rupee be based on blockchain?
Experts say that the CBDC for retail would likely be on a Distributed Ledger Technology and not necessarily the blockchain.
– Is CBDC a Cryptocurrency?
Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs are not cryptocurrencies. CBDCs are controlled by a central bank, whereas cryptocurrencies are almost always decentralized, meaning they cannot be regulated by a single authority.
- Report on Currency and Finance 2020–21
- Security of a CBDC
- Central Bank Digital Currency — Is This the Future of Money
That’s it for now! I hope you find this article by Hashtrust Technologies helpful. Thanks for reading.