Everything you need to know about the digital rupee ie Central Bank Digital Currency (CBDC)

On November 1, the Reserve Bank of India (RBI) began a trial for a pivotal digital rupee for the wholesale segment.   The Reserve Bank of India RBI, which has consistently stated its aversion to private digital currencies, suggested to the Indian government in October last year that it expand the definition of the paper rupee to incorporate Central Bank digital currency (digital rupee). The pilot will involve nine banks, including the State Bank of India. Other institutions collaborating in the pilot include Bank of Baroda, Yes Bank, Kotak Mahindra Bank, Union Bank of India, ICICI Bank, IDFC First Bank, HDFC Bank,  and HSBC, as per the news report.

Central Bank Digital Currency introduced by RBI

What exactly is the Central Bank Digital Currency (CBDC)?

Central Bank Digital Currency (CBDC) is defined by the Reserve Bank as a digital version of legal cash generated by a central bank. Simply explained, it is a digital version of fiat cash, specifically the Indian Rupee. As an outcome, it can be swapped for fiat money. In other words, it will function similarly to a flat currency but in a different manner. In this situation, blockchain will support the Digital Rupee. The currencies will be traded via blockchain lockers. CBDC has the following features:

  • CBDC is a sovereign currency that central banks issue in accordance with their monetary policies.
  • It displays on the central bank’s financial statements as a debt.
  • CBDC is projected to reduce the cost of money production and transactions.
  • All individuals, businesses, and governmental entities must use it as a method of payment, legal tender, and stable storage of value.
  • CBDC can be freely converted into commercial bank money and cash.
  • CBDC is fungible legal money that does not require holders to have a bank account.

Availability and Purpose

The use of the digital rupee in the wholesale segment is projected to improve the efficiency of interbank trade, as stated by the RBI. It’s going to be initially available for the wholesale market before being expanded to the retail market in a month. According to the RBI, a retail e-rupee pilot project will start within just a month in chosen regions with limited customer segments. Relying on the pilot’s findings, future pilots will concentrate on wholesale transactions and cross-border settlements. Transaction expenses would be reduced if payments were made in central bank digital currency. The RBI cited the following factors as factors for India to consider introducing CBDC:

  • Cost savings linked with paper cash management
  • To advance the goal of digitization to build a cashless economy.
  • Promoting payment competitiveness, effectiveness, and innovation
  • Investigate the usage of CBDC to enhance cross-border transactions.
  • Encourage financial inclusion
  • Protect the common man’s confidence in the country’s currency in the face of the proliferation of cryptocurrencies.

Types of digital rupees to be introduced

The digital rupee will most likely not bear interest and will merely be a digital counterpart of paper currency. The RBI is expected to issue 2 kinds of CBDCs: a general purpose or retailer CBDC (CBDC-R) & a wholesaler CBDC (CBDC-W). The retail CBDC, like paper currency, is a financial liability of the Rbi that will be available to the private market, non-financial users, and companies. The wholesale CBDC will be utilized primarily for wholesale activities such as interbank transactions. CBDCs of both types may offer advantages. As a result, a hybrid of the two is likely to be launched.

How Central Bank Digital Currency (CBDC) is better than various famous cryptocurrencies?

There is one significant distinction between CBDCs and Bitcoin. While Bitcoin, Dogecoin, and other famous cryptocurrencies use blockchain solutions, they do not have legal tender authority. Despite their growing prominence in India, their usage is still not regulated. the Digital Rupee is intended to be legal money and legally recognized all through the nation because the RBI would guarantee it. Furthermore, the value of bitcoin is determined by the public opinion of it so can vary fairly dramatically, making it inappropriate as a storage of value which will not be the case with CBDC or the Digital rupee.

We have also already witnessed a huge crypto wipeout in recent months, with the worth of cryptocurrencies such as Bitcoin and Ethereum dropping to all-time lows. And, because cryptocurrency has the potential to conduct unlawful transactions, a currency backed by a central bank such as the RBI is always secure.

Read More: Pradhan Mantri Kisan Samman Nidhi Yojna: benefits, eligibility requirements, registration procedure, and more

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