What has happened?
- Reports on Monday (August 22) said the Reserve Bank of India’s (RBI) digital rupee — the Central Bank Digital Currency (CBDC) —
- May be introduced in phases beginning with wholesale businesses in the current financial year.
- In her Budget speech on February 1, Finance Minister Nirmala Sitharaman had said that the central bank would launch the CBDC in the financial year 2022-23.
- RBI, which has repeatedly voiced its opposition to private digital currencies, had proposed to the government in October last year to widen the scope of the paper rupee to include currency in a digital form.
- The report added that the Digital Rupee is designed in such a way that it leaves no room for anonymity for its users.
What is CBDC?
- According to the RBI, “CBDC is the legal tender issued by a central bank in a digital form.
- It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.”
- The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
- Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state
- and lack the ‘legal tender’ status.
- CBDCs enable the user to conduct both domestic and cross-border transactions which do not require a third party or a bank.
How will the CBDC help?
- Minister of State for Finance Pankaj Chaudhary had told Lok Sabha last year:
- “Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk.
- Introduction of CBDC would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.”
- He had added, however, that “There are also associated risks which need to be carefully evaluated against the potential benefits.”
- RBI has repeatedly flagged concerns over money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc. Introducing its own CBDC has been seen as a way to bridge the advantages and risks of digital currency.
Changes in the law
- Ajay Kumar Choudhary, executive director (fintech) of the RBI said that the Finance Act, 2022, made the necessary changes to the RBI Act, 1934,
- To allow the central bank to roll out the CBDC this year.
- Sections of the RBI act were amended to treat CBDC as banknotes as well.
- The government had been planning at the time to introduce a Bill in Parliament that would prohibit “all private cryptocurrencies in India” with “certain exceptions”.
How will impact the citizens?
- There are several models proposed by technology experts and evangelists on how the digital rupee could be transacted, and the formal announcement by the RBI will likely provide the details.
- One chief difference could be that a digital rupee transaction would be instantaneous as opposed to the current digital payment experience.
- The Indian government has been projecting the Digital Rupee as a method to further digitalise India’s financial systems.
- Further, the RBI has noted that since India has a high GDP to currency ratio, CBDC will allow sustained use of banknotes for small ticket transactions, while large transactions can be carried out using CBDC.
Q) Which of the following is a step that the central bank will take to encourage greater investment in the economy?
- Increase the cash reserve ratio
- Reduce the cash reserve ratio
- Increase the bank rate
- Sell the government securities in the open market