The RBI has published a concept note on central bank digital currency and will shortly begin testing the Digital Rupee
A concept note on Central Bank Digital Currency (CBDC) was also released by the Reserve Bank of India on Friday. Its goal is to raise awareness of such currencies in general and the planned features of the Digital Rupee in particular. The Reserve Bank of India announced on Friday that it will soon begin a pilot launch of the e-rupee for specific use cases. This announcement was made just a few days after the launch of 5G in India by PM Narendra Modi.
The RBI stated in a statement that it will periodically communicate about the unique characteristics and advantages of the digital rupee as the size and scope of such pilot launches grow. Simultaneously, web 3.0 initiatives are anticipated to boost the digital economy of India.
“In addition to the existing payment options, there will be an e-rupee. It is essentially identical to banknotes, but because it is digital, it is probably simpler, quicker, and less expensive. Additionally, it offers all the advantages for transactions of other types of digital money, “RBI said.”
According to the central bank, the concept note examines important factors such as technology and design options, potential applications for the digital rupee, issuance methods, etc. It analyzes privacy concerns and looks at how the adoption of CBDC would affect the banking system, monetary policy, and financial stability.
According to the RBI, CBDC is widely defined as digitally issued legal money from a central bank. Similar to sovereign paper money but in a new format, it may be exchanged at par with current money and will be recognised as a means of payment, legal tender, and a secure place to keep wealth. On the balance sheet of a central bank, CBDCs would show up as liabilities.
The finance minister had stated that the RBI would launch a digital counterpart to the rupee in the current fiscal year in the Union Budget for 2022–2023.
The central bank will introduce its digital money as a pilot project this year, according to an interview given by RBI Deputy Governor T Rabi Sankar last month. According to him, CBDC is the most effective mechanism for cross-border payments. However, he emphasised that the RBI does not want a cashless world and instead seeks to provide workable alternatives.
Sankar had previously said that CBDCs may “kill” the meagre support that private virtual currencies like Bitcoin could have.
The Indian central bank has expressed grave worries about cryptocurrencies and has aggressively opposed cryptocurrencies like Bitcoin. The RBI said that because these instruments are fundamentally speculative, they lack an underlying value.
However, the CBDC, being a sovereign currency, has special benefits over central bank money, including integrity, trust, safety, and liquidity.
A 30% tax on income from the transfer of virtual digital assets was also proposed by Finance Minister Nirmala Sitharaman during her budget address in February; this tax is already in effect as of April 1. The government has not yet made it clear how it feels about regulating or outlawing cryptocurrency.
The administration has insisted that imposing the tax does not imply acknowledging these assets and that they would be handled independently following extensive discussions.
According to the RBI, recent advancements in technology-based payment methods have prompted central banks throughout the world to consider the advantages and disadvantages of issuing a CBDC to keep up with the current pace of innovation.
As a result, the RBI has been weighing the advantages and disadvantages of CBDC introduction for some time and is currently working on a phased implementation strategy, which involves a series of pilot projects before the final launch. At the same time, the RBI is also considering use cases for the issuance of its digital rupee, which would cause little to no disruption to the financial system.
“A watershed movement in the history of money is currently underway, one that will fundamentally alter the very nature of money and its purposes.”
Regarding the effects of CBDC on liquidity management, the RBI stated that the switch from physical to digital currency may alter how the general public holds their money.
Due to the potential for CBDCs to replace commercial banks’ deposits, the impact on reserve money, money supply, and net demand and time liabilities (NDTL) of banks would be significantly greater. Commercial banks will therefore face funding constraints and depend increasingly on central bank liquidity provisions. As a result of financial disintermediation, the central bank predicted that the balance sheet would become bloated and reserve money would increase.
However, unpaid CBDC can greatly reduce possible monetary policy and financial intermediation process disturbances.
The central bank stated that the introduction of the Digital Rupee system will “further strengthen India’s digital economy, make the monetary and payment systems more efficient, and help to increase financial inclusion.”
