Digital rupee on the horizon
Nowadays, there is a digital version for almost everything, and money is no exception. Traditional methods fall short when it comes to representing and transmitting money in comparison to zeros and ones.
Digital currencies are rapid, light, and getting more and more practical. A type of money that can only be acquired digitally is known as digital currency. It might be kept on a decentralised ledger or blockchain, a centralised database, or both.
India is aiming to implement so-called “digital currency.” The money, which will be known as the E-Rupee, is designed to make payments a lot more effective.
By early 2023, India’s very own official digital currency, which would resemble any of the present private company-operated electronic wallets but differ in that it will be a facility endorsed by the government, is anticipated to make its debut.
Reserve Bank of India and it’s role with the digital rupee
The Reserve Bank of India announced its plans to introduce the Central Bank Digital Currency through a “graded approach” in its annual report, which was published on Friday, May 27. It stated that the goals of its monetary policy, financial stability, and effective functioning of currency and payment networks had to be aligned with the design of the central digital coin. The RBI made its announcement months after claiming to be ready to launch the CBDC’s testing and pilot project operations.
A central bank digital currency (CBDC) is being introduced in India by the Reserve Bank. The CBDC’s design must adhere to the stated goals of monetary policy, financial stability, and effective currency and payment system operations.
The Reserve Bank wants to introduce CBDC gradually, working through the Proof of Concept, pilot, and launch stages one at a time. The Union Budget for 2022–2023 declared the implementation of CBDC, and the Finance Bill for 2022 contains the necessary amendments to the RBI Act, 1934. The Finance Bill, 2022 has been passed, creating the necessary legislative basis for CBDC’s establishment.
How is a digital currency different from cryptocurrency?
The digital rupee, which will be backed by the government, would be the electronic equivalent of the physical money that the RBI issues. Cryptocurrencies, on the other hand, are not backed by a government or central bank and can be used as a form of payment or an asset class.
The digital rupee will be distinct from Bitcoin, Ethereum, and other cryptocurrencies in that it will be backed by the government, to use common language. Second, the digital rupee will be similar to holding a physical rupee equivalent since it has an intrinsic worth due to government backing.
Bitcoin and other cryptocurrencies won’t be accepted as legal cash in India anytime soon, but the digital rupee may be. According to RBI Governor Shaktikanta Das, privately developed cryptocurrency poses a serious danger to the nation’s macroeconomic and financial stability.
The digital rupee will function similarly to banknotes without ATMs. Users will be able to move money in the form of online tokens, which will be a direct concern of the Reserve Bank of India, much like cash, from their bank deposits into their smartphone wallets.
In comparison to bank deposits, which support 76 trillion rupees ($1 trillion) in yearly real-time payments made through applications like Walmart Inc.’s PhonePe, Alphabet Inc.’s Google Pay, and the homegrown Paytm, consumers may find the digital rupee to be a safer choice.
However, therein also lies the danger. Weaker banks might find it difficult to hold onto sticky, low-cost deposits if electronic cash becomes widely used and the RBI does not impose any restrictions on the amount that can be saved in mobile wallets. And yet they still lose that.
Every economy is aware of this risk to the stability of the financial system. But developed nations are also concerned about the declining use of paper money, particularly in the wake of the pandemic. The belief that demand deposits would convert to cash at face value may become less and less real as more transactions take place online. The idea of convertibility could be maintained by using digital money as a common good.
Cross-border payment settlement won’t require a costly system of correspondent banks once international exchange corridors for CBDCs are established. Indians working overseas will find it easier and less expensive to send money home, which will result in significant savings for the country, which is the world’s top beneficiary of remittances from abroad. However, some of those advantages are still accessible through a worldwide network of bank-based online payment systems, even in the absence of a digital rupee.
A digital rupee might be very beneficial. One reason is that the monetary authority might not be a terrible idea to employ technology to alert bank managements to the fact that they cannot continue to take depositors for granted. However, it is generally preferable to teach that lesson when lenders have recovered from the impact of the epidemic on their balance sheets.
Additionally, the RBI needs to undertake its research. It is necessary to develop a protocol for offline use because of India’s still significant digital divide. It may be risky to rush the implementation of a project that should ideally last for several years.