Digital Rupee

The Indian Union Budget 2022 this year had two noteworthy announcements. First, India not only joined the list of nations that have crypto tax jurisdictions but would also be amongst the Central Bank Digital Currency club. In her Budget speech, Finance Minister Nirmala Sitharaman announced the intention to introduce a Central Bank Digital Currency (CBDC) – a digital rupee, in the 2022-23 fiscal year. 

The history of digital cash starts in 1983 through a research paper by David Chaum. But, first, let us learn more about CBDCs and the proposed digital rupee.  

What are CBDCs?

CBDCs are a digital version of government-backed fiat money, and that country's fiat currency is what they are pegged at – INR or Indian Rupee, in India's case. There is a credit-based fiat model with CBDCs, and the balances and transactions are recorded digitally. In India's case, the nation's monetary authority or central bank – the Reserve Bank of India (RBI)- issues and regulates them.  

The primary goal of CBDCs is to render businesses and consumers privacy, transferability, convenience, accessibility, and financial security. Cash, or the fiat currency, is a counterbalance to all the risks associated with financial instruments, including a bank deposit. CBDCs would serve as a toggle switch towards the risk of a bank collapse. They also provide a country's central bank with the means to implement monetary policies to provide stability, control growth, and influence inflation.  

Digitization in payments could lead to transactions that are much faster, cheaper, and more secure, which benefits everyone involved. In addition, the current COVID-19 pandemic has accelerated the shift toward digital payment methods. In India, the payments revolution has made sure that these digital payments are adopted by the masses and are convenient. 

India will be part of 78 countries that have CBDC initiatives or projects. As of February 2022, there are nine countries to have launched CBDCs. The Bahamas Sand Dollar, Chinese RMB, and Nigerian eNaira are noteworthy among them.  

CBDC vs. Cryptocurrency

Although the fundamental idea for CBDCs came from the same concept that gave birth to cryptocurrencies – CBDCs are not cryptocurrencies. Instead, CBDC and cryptocurrency are two distinct types of digital currencies. Also, CBDCs may not require blockchain technology or consensus mechanisms. 

Cryptocurrencies are volatile assets more suited for speculation, and their demand is derived as per the investor sentiments, usage, and user interest. Transactions for cryptocurrencies are processed and recorded on a publicly available distributed ledger – a blockchain. In contrast, a central bank controls CBDCs.  

The digital rupee

The RBI is developing a digital rupee that would trace all transactions. Presently, in India, people transfer money to a private company by using electronic wallets – like Paytm, Google Pay, PhonePe, and many more. The companies hold the money on behalf of the user and pay the merchant when a transaction occurs. For the digital rupee, the users will be holding a digital currency on their devices instead of a note. 

An RBI official shared: "If you buy something from a shopkeeper and pay through digital money and that digital money is used to pay his vendor by the shopkeeper, RBI will have all the data of transaction done with the digital rupee." 

The government has indicated that the digital rupee will be ready by the end of the next fiscal year. 

Digital rupee vs. UPI

Digital Rupee will be the fundamental payment mode that can be used for digital payments instead of fiat currency. Payment platforms like Unified Payments Interface (UPI) use fiat currency to transfer the funds during a transaction. Also, UPI payments are made using the digital equivalent of the existing fiat currency. Therefore, every transaction through UPI needs to be backed by physical money. 

In the case of the digital rupee, the payment process will not be any different from the ones currently used to do regular transactions through UPI. It will be operated directly by RBI, instead of any bank intermediaries - in the case of UPI. Moreover, the digital rupee will not need backing by physical currency since it will be a legal tender. 

Additionally, UPI payments depend on the transaction settlement between banks via the RBI. This will change for the digital rupee since the transaction will occur directly from the RBI and settle immediately.  

Conclusion: Love it or hate it, but you cannot ignore it

CBDCs are a digital version of government-backed fiat money, and that country's fiat currency is what they are pegged at – INR or Indian Rupee, in India's case. There is a credit-based fiat model with CBDCs, and the balances and transactions are recorded digitally. In India's case, the nation's monetary authority or central bank – the Reserve Bank of India (RBI)- issues and regulates them.  

The primary goal of CBDCs is to render businesses and consumers privacy, transferability, convenience, accessibility, and financial security. Cash, or the fiat currency, is a counterbalance to all the risks associated with financial instruments, including a bank deposit. CBDCs would serve as a toggle switch towards the risk of a bank collapse. They also provide a country's central bank with the means to implement monetary policies to provide stability, control growth, and influence inflation.  

Digitization in payments could lead to transactions that are much faster, cheaper, and more secure, which benefits everyone involved. In addition, the current COVID-19 pandemic has accelerated the shift toward digital payment methods. In India, the payments revolution has made sure that these digital payments are adopted by the masses and are convenient. 

India will be part of 78 countries that have CBDC initiatives or projects. As of February 2022, there are nine countries to have launched CBDCs. The Bahamas Sand Dollar, Chinese RMB, and Nigerian eNaira are noteworthy among them.  

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