The RBI’s next effort to enhance India’s digital economy will be the Digital Rupee or Central Bank Digital Currency (CBDC). The Digital Rupee proposed by Finance Minister Nirmala Sitharaman during the Union Budget 2022-23, is intended to take some inspiration from cryptocurrencies like Bitcoin while adhering to central bank standards.
The Finance Minister said during the budget speech that the Digital Rupee or CBDC would function using blockchain and other technologies. As a result, it is one feature that all cryptocurrencies have in common with India’s upcoming digital currency. The other is the issue it intends to address: India’s digital currency would lead to a more efficient and less expensive currency management system according to the minister.
With such benefits contributing to India’s digital economy’s forecasted growth the Reserve Bank of India’s Digital Rupee is expected to debut in 2022-23, according to budget predictions. Even if their goals may be similar this last piece of information seems to be the only significant distinction between the CBDC and Bitcoin or any other cryptocurrency.
How can I get it?
As the Reserve Bank of India prepares to launch the Digital Rupee this year, the central bank will soon provide buyers with information on how and when to purchase it. The acquisition of the Digital Rupee is anticipated to be similar to that of Bitcoin or other cryptocurrencies.
What is a CBDC?
A Central Bank Digital Currency (CBDC) is a digital form of legal money issued by a central bank. It functions similarly to conventional money, with the exception that it is digital. CBDC may be treated and regarded in the same way as fiat money such as paper notes and coins as well as checks stocks and bonds are.
A CBDC is said to be able to be used to pay for goods and services as well as perform other financial transactions. Its sole distinguishing feature is its form. To put it another way, it’s like having $100 in cash, but it’s all saved in your smartphone’s digital wallet. CBDCs and cryptocurrencies like Bitcoin have a lot in common: they both need a digital wallet to securely store manage and use assets.
It’s important to remember, however that each of these digital currencies has distinct characteristics that set them apart from one another; we’ll go over this in more depth later. But first let’s take a look at some of the possible reasons for India’s own digital currency.
What is the aim of a CBDC, exactly?
While CBDCs are gaining popularity only a few countries have moved past the pilot stage of building their own CBDCs. According to a BIS survey of central banks done in 2021, 86% were actively studying the prospects for CBDCs 60% were experimenting with the technology and 14% were implementing trial programs. What is the cause of this abrupt arousal of curiosity? CBDC was justified in its acceptance for the following reasons:-
As paper money use declines central banks (such as Sweden’s) are striving to promote a more acceptable electronic form of currency.
Countries that utilize a lot of physical money and wish to improve the efficiency of issuing it (such as Denmark Germany Japan or even the United States); As seen by the expanding use of private virtual currencies central banks are seeking to meet the public’s need for digital currencies while also avoiding the more damaging consequences of such private currencies.
Bill 2021 on Cryptocurrency and Formal Digital Currency Administration
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was set for passing during the Winter session of Parliament last year. Its purpose was to offer a framework for the creation of the Reserve Bank of India’s official digital currency. The legislation also planned to ban all private cryptocurrencies in India, with specified exceptions to support the underlying technology and uses of bitcoin. However, for the time being, the Centre has postponed the introduction of this bill.
What is the use of Digital Rupee?
CBDC will have all of the benefits of cryptocurrencies and other digital payment methods. For starters digital money cannot be torn, burnt, or physically damaged. They can’t be physically lost either. Unlike notes, the life of a digital form of money will be limitless. The transition to digital payment methods at the same time will have its own set of benefits. Because transactions would be done digitally, the government will save money on currency manufacture. The transactions will be rapid and accessible from anywhere in the world.
Another big advantage over cryptocurrencies will be provided by the Digital Rupee. It will be managed by a central authority, which will reduce the risk of volatility that other digital currencies, such as Bitcoin, present. This brings us to the only real difference between the two.
Bitcoin and Digital Rupee are not the same things
The future of India’s own virtual currency was previously uncertain. The country’s adoption of blockchain and other technologies was confirmed in the new budget which shed some light on the matter. While there was once assumed to be a difference between the Digital Rupee and Bitcoin, there is now none.
Blockchain technology is decentralized by definition which means that all of its data is stored on a network of computers. This makes the data more resistant to both human and cyber-attacks. For cryptocurrencies like Bitcoin, this network is used worldwide across the systems of its developers.
In Digital Rupee a somewhat modified version of this will be accessible. Because the currency will be managed by the RBI it will not be really decentralized. That is one entity is in charge of its issuance and distribution which is the polar opposite of what decentralized really entails.
In the context of the Digital Rupee, the word decentralized exclusively relates to blockchain technology and its network of computers. The RBI will be obligated to set up this network in the future but it will only be for the bank and its linked entities. According to a PWC report, the CBDC may need some underlying mechanism for public issuance and distribution and the RBI may be compelled to include public and private banks, payment service providers, and network operators.
India’s own digital currency has several advantages
The implementation of CBDC has the potential to provide significant benefits including a reduction in dependence on cash enhanced seigniorage due to decreased transaction costs, and reduced settlement risk. CBDC might pave the way for a more dependable efficient, trustworthy regulated and legal tender-based payment system. To be sure there are risks involved, but they must be carefully balanced against the potential benefits. As we get closer to India’s CBDC the RBI’s objective will be to take the necessary steps to reassert India’s leading position in payment systems.
T Rabi Sankar Deputy Governor of the Reserve Bank of India said in July 2021.
This has far-reaching implications for the financial system as a whole and it highlights India’s digital finance leadership. Even the United States hasn’t started its CBC yet. The CBC suggests that users make use of the benefits of blockchain right now, such as lower OPEX and faster settlements.
The government’s substantial capital expenditure in currency creation would definitely be reduced by the coming digital rupee cryptocurrency. Will the government, on the other hand, place limitations on circulating supply? Otherwise, the country’s financial system’s financial stability may be compromised. According to Abhinav Soomaney, a forensic and crypto specialist blockchain is a trustworthy data source but if it is infiltrated hackers may easily grab a big number of rupee coins inflicting major economic devastation to the country.
The introduction of a Rupee Digital Currency in the Budget is expected to act as a catalyst in the development of a future value transfer platform, assisting in the development of a more robust, innovative, and competitive payment system for families, businesses, and the economy as a whole.This would lead to advancements in capital market securities settlement atomic transactions DBT-based programmable payments, and ultimately cross-border payments. Monish Shah a partner at Deloitte India, said.
Why would India’s central bank (RBI) launch its own cryptocurrency?
India is one of the top countries in terms of digital payment development. Payments may be made instantly and for a modest fee throughout the country. This is most likely why many multinational firms with operations in India now accept payments in digital money. According to the Reserve Bank of India’s (RBI) website, the following are the grounds for CBDC adoption:
- As paper money use declines, central banks are striving to promote a more acceptable electronic currency (like Sweden)
- Jurisdictions that utilize a lot of real money and wish to boost their issue efficiency (like Denmark Germany Japan or even the US)
- Central banks try to meet the public’s need for digital currencies as seen by the rising use of private virtual currencies while avoiding the more negative consequences of such private currencies.
According to some sources creating a CBDC would aid the country’s transition away from a cash economy. International payments and transactions will be cheaper faster, and more convenient as a consequence. It’s also considered to push payment systems to become more real-time and cost-effectively internationalized. CBDC might also protect consumers from the volatile nature of private cryptocurrencies such as Bitcoin. CBDC is seen as a mechanism for increasing financial inclusion, modernizing India’s banking system, and establishing a cashless economy in India.
Types of Cryptocurrencies
Bitcoin is the most well-known and valuable cryptocurrency. It was invented and given to the world in 2008 through a white paper by a mysterious entity known as Satoshi Nakamoto. There are dozens of cryptocurrencies on the market right now.
Every cryptocurrency claims to have its own set of specifications and goals. Ethereum’s ether for example, is sold as gas for the smart contract platform’s underlying smart contracts. Ripple’s XRP is used by banks to facilitate cross-border transactions.
The most commonly traded and covered cryptocurrency is Bitcoin, which was first made accessible to the public in 2009. There were around 18.8 million bitcoins in circulation as of November 2021, with a total market value of roughly $1.2 trillion. There will only ever be 21 million bitcoins generated.
Following the success of Bitcoin, a swarm of other cryptocurrencies known as altcoins has sprung up. Some may be forks or clones of Bitcoin, and others are whole new currencies. Among them are Solana, Litecoin Ethereum Cardano and EOS. By November 2021, the total value of all cryptocurrencies had topped $2.1 trillion with Bitcoin representing around 41% of that total.
Why are there so many different cryptocurrencies?
People have attempted to improve current functionality and add new functionality using additional cryptocurrencies as a result of Bitcoin’s success. Investors and developers on the other hand were undoubtedly looking to profit.
Is it conceivable for cryptocurrency to go bankrupt?
Yes. It is estimated that around 2,000 cryptocurrencies have failed. This is due to a variety of circumstances including a shortage of funds at the start and later on, an inability to adapt and a few outright frauds. Many of the failures occurred during the initial coin offering (ICO) boom of 2017–2018.