The Reserve Bank of India is set to launch the pilot of its central bank digital currency (CBDC), categorizing it as legal tender in a digital form. Commonly known as the digital rupee, it will be exchangeable on par with existing currencies and will be considered acceptable for payments and a secure store of value.
Also called the e₹ or the digital rupee, CBDC aims to create an additional option to use money and is not very different from the currently issued banknotes; only the digital rupee is expected to be digitally traded and facilitate ease of use.
The digital rupee is the RBI’s accepted version of cryptocurrencies, which the central bank has repeatedly dismissed as a serious challenge to the stability of the country’s financial system.
What is digital rupee?
A digital currency is any currency that is available entirely in electronic form. Electronic types of currencies already dominate a large number of nations’ financial systems. However, digital currency is exchanged exclusively through virtual means and does not leave a computer network.
The three main varieties of digital currency are cryptocurrency, central bank digital currency (CBDCs) and stablecoins.
The foundation of cryptocurrency is provided by blockchain technology which is the most common form of distributed ledger used by digital currencies. According to CoinMarketCap, the availability of cryptocurrencies is more than 21,000.
What are the benefits of digital rupee?
Here are some of the advantages of digital currency:
Faster payment mode
Digital currency can make your payments much faster than current means such as automated clearing houses or bank transfers that take days for financial institutions to confirm a transaction.
Cheaper global transfers
Sometimes global transactions can become very expensive. Individuals are charged high fees to move funds from one nation to another, especially when it involves currency conversions. Digital assets can disrupt this market by making the transaction cost-effective and fast.
24/7 Availability
Digital currency transactions operate at the same speed ie 24 hours a day and seven days a week. On the other hand, existing money transfers often take more time during weekends and outside normal business hours because banks are closed and unable to confirm transactions.
No manufacturing required
Physical currencies have many requirements such as establishing physical manufacturing facilities. Whereas, in digital currencies, no such expense is involved. Digital currencies are also immune to contamination or physical defects present in physical currency.
Well organized government payments
If the government developed a central bank of digital currency, it could send payments like child benefits and food stamps, and tax refunds to people instantly, rather than trying to figure out prepaid debit cards or mail them a check.
What are the disadvantages of digital rupee?
Here is a list of some disadvantages of digital rupee:
Options
The crypto popularity is a downside. According to the head of Sidley’s FinTech and Blockchain group Lilya Tessler, across different blockchains, there are various digital currencies that are created with their own limitations.
It will take a certain amount of time to decide which digital currencies may be appropriate to use in certain cases. It also includes whether some are designed to scale for mass adoption.
Expensive transaction
Crypto uses blockchain technology where computers must solve complex equations to validate and record transactions. This in turn takes a significant amount of electricity, the more the transaction the more the expense.
However, this is unlikely to exist for the central bank of digital currencies, as complex consensus processes are not required and CBDC will likely oversee them.
Steep learning curve
On the user side, digital currencies require work to learn fundamental tasks, such as how to open a digital wallet and securely store digital assets. For the widespread adoption of digital currencies, the system needs to be simplified.
Issues of cyber security
The digital currency has constantly made people worry about cyber security and has faced many threats due to less secure methods of storing this money. Cyber attacks are likely to increase and may also threaten users of digital currency with virtual theft.
Cryptocurrency vs Digital Rupee
According to the RBI, a CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is one-to-one exchangeable with the fiat currency. Only its form is different.”
But a CBDC cannot be exactly compared to cryptocurrencies.
“Unlike cryptocurrencies, a CBDC is not a commodity or claims on commodities or digital assets. Cryptocurrencies have no issuer. They are not money (certainly not currency) as the word is historically understood, ” as said in the announcement made by RBI.
The CBDC is the digital avatar of paper currency issued by central banks like RBI and must be exchangeable with cash. The commonly known digital rupee is a currency issued by the RBI and the digital rupee will have the same function but it will not be a decentralized asset like cryptocurrencies. Digital rupee will be a currency issued by central banks responsible for the control and management of the asset.
The digital rupee will be legal tender, meaning you can use it to buy whatever you want. For example, digital wallets, NEFT and IMPS are examples of digital rupees. So, when the RBI starts circulating the digital rupee, all citizens of India can use it.
Countries considering CBDC
With the recent popularity of a cashless or digital financial framework, world governments and central banks (some of them have also implemented) are exploring the possibilities of digital currency.
The Bahamas, Nigeria, Dominica, Montserrat, Antigua and Barbuda, Saint Lucia, St Kitts and Nevis, St Vincent and the Grenadines have already launched their digital currency.
Russia – the Digital Ruble has completed the initial trials – full cycle of transactions as announced by the central bank of Russia.
China – plans to launch the eCNY or digital Yuan by 2022.
Do we need the digital rupee?
The main reason for launching a digital rupee by the RBI is to push India forward in the virtual currency race. And of course due to the increasing importance of cryptocurrency.
With blockchain technology, the digital rupee will increase efficiency and transparency. Blockchain will also enable real-time tracking and ledger maintenance. The payment system will be available 24/7 for wholesale and retail customers. Indian buyers can pay without a middleman. Lower transaction costs. Real-time account settlements. You don’t need to open a bank account to trade with a digital rupee. Fast cross-border transactions. No risk of volatility like the RBI will support it. Compared to currency notes, the digital rupee will be forever mobile.
But with a major payment system like UPI, can CBDCs up the game?
According to a survey by the RBI, cash remains the preferred method of payment for receiving money for regular expenses. Cash is mainly used for small value transactions (amounts up to INR 500).
Does the new 30% tax on cryptocurrencies include digital rupees?
All cryptocurrencies like Bitcoin, Ethereum, Litecoin etc., will not be tax exempt.
Only RBI’s digital rupee will be free from tax regulations.
Read our guide on how cryptocurrencies are taxed in India.
Bottom line
By introducing the digital rupee, the RBI expects to address problems related to existing physical currencies and cross-border transactions.
Cross-border money transfer and converting the money into foreign currency is tedious and expensive. With the introduction of the digital rupee, the instant cross-border money transfer has been introduced to make bank cash management and operations more seamless.
In India, cash placement and tracking of the same is a challenge. CBDC can address anonymity and solve it in a non-intimidating way and reduce the demand for cash. The government will save on operational, printing, distribution and storage costs – empowering the government’s vision for a cashless economy.
Frequently Asked Questions (Frequently Asked Questions)
What is a central bank digital currency?
A central bank digital currency (CBDC) is a digital currency issued and overseen by a country’s central bank. One hundred plus countries are exploring CBDCs at one point or another, according to the International Monetary Fund (IMF). But as of the year 2022, only a few countries have CBDC or have firm plans to issue it.
What is the differentiation between digital currency and cryptocurrency?
What are the types of digital currency?
How can users invest in the central bank’s digital currency?
What is the main disadvantage of a digital currency that can affect me?
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