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Understanding the Digital Rupee
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Understanding the Digital Rupee
Understanding the Digital Rupee

Central Bank Digital Currency (CBDC), as per the Reserve Bank of India (RBI), is a digital representation of legal tender money issued by a central bank. It is a digital version of the Indian Rupee, fiat currency. Consequently, it may be traded for fiat money on a one-for-one basis. Fiat money is a type of currency that the government of a nation issues. Historically, it was distributed by banknotes and coins. It is regarded as legal currency and may be used to purchase and sell goods and services. Governments and financial organizations have transitioned away from physical fiat money and toward a credit-based fiat paradigm in which balances and transactions are recorded digitally.

According to Union Finance Minister (FM) Nirmala Sitharaman, the Reserve Bank of India (RBI) would establish a central bank digital currency (CBDC) around 2022-23. This is the Union government's first official statement on the much-anticipated digital money.[1]

According to the FM, the development of CBDC would improve the digital economy and be based on blockchain technology. Despite the central bank's opposition to private virtual currencies, the Reserve Bank of India (RBI) has previously declared that CBDC is on the cards.

Given India's world-class digital payments infrastructure, the FM believes that the introduction of CBDC will further strengthen India's position as a digital economy.

The current buzzword in the realm of digital assets is Central Bank Digital Currency (CBDC). According to a BIS poll from 2021, 86 per cent of central banks were exploring the possibilities of CBDCs, 60 per cent were experimenting with the technology, and 14 per cent were conducting trial programmes.[2]

The technology behind CBDC

CBDC, being a digital representation of fiat money, may seem to be comparable to its decentralised equivalent, Bitcoin. There is, however, a technical difference between the two. While CBDCs and Bitcoin are built on distributed ledger technology (DLT), the former is distinguished by permission identification. The permissionless blockchain of Bitcoin enables any user to run the programme and execute transactions, while CBDC's permissioned blockchain operates as follows:

• In the case of a CBDC, the DLT includes several copies of financial records of transactions, rather than a single central database;

 • Each copy in this ledger is maintained and held by a separate financial company, which in turn is supervised by the country's Central Bank. These organisations collaborate on distributed DLT.

• The central monetary authority maintains control over access to the blockchain containing financial data, which may be viewed or changed by only a select few.

How does the digital rupee work?

A CBDC is a digital version of fiat currency that will make transactions more convenient. CBDC was previously described in a paper by the RBI as a "secure, resilient, and convenient alternative to physical currency." According to the RBI, it can also take on the complicated shape of a financial instrument, depending on numerous design decisions. The digital rupee will represent real currency issued by the Reserve Bank of India and guaranteed by the sovereign. By contrast, a government or central bank does not ensure cryptocurrencies and may function as an asset class or a payment system.

How is CDBC different from cryptocurrency?

CBDC is a public cryptocurrency, not a private cryptocurrency. It is a digital type of legal tender instead of private virtual currencies. Private virtual currencies are opposed to the traditional understanding of money. Because they have no intrinsic worth, they are not commodities or claims on commodities. In contrast to Bitcoin, Ethereum, and other cryptocurrencies, the government will support the digital rupee. Since the government backs the digital rupee, it will have inherent worth. Possessing a physical rupee equivalent will be comparable to holding a digital rupee.

Types of CDBC:

  1. Retail CBCDs – Retail CDBC is the most common type of CBCD. Individuals, homes, and businesses may all benefit from CBCDs.
  2. Wholesale CBCDs: Wholesale CBCDs are intended for financial firms to employ.

Significance and benefits of CDBC

According to the Reserve Bank of India (RBI), technological breakthroughs are rapidly changing the payments environment, encouraging central banks throughout the world to contemplate using technology to create fiat money in digital form. Central banks throughout the globe are now examining the advantages of digital currencies in terms of financial inclusion, economic development, technology, innovation, and improved transaction efficiency. The Reserve Bank of India has stated that a feasibility study on forming a government-backed digital currency is conducted.

  • Real-time money transfer: Without the need for intermediaries such as banks, money transfers and payments may be made in real-time from the payer to the payee.
  • Easy currency tracking: When a country implements CBDC, its central bank will trace the precise location of each unit of currency.
  • Income Tax: Tax evasion and avoidance will be nearly impossible, as tactics such as offshore banking and unreported employment will be unable to conceal financial activity from the central bank.
  • Combating Crime: Criminal acts such as terror funding, money laundering, and so on may be readily identified and stopped.
  • A modern alternative to physical cash: Central bank-issued digital currencies would give a modern alternative to physical currency.
  • Seigniorage revenue: The issuance of digital money would prevent governments from losing seigniorage income if physical cash disappeared. The discrepancy between the value of currency/money and the cost of production is called seigniorage. It is the profit the government earns from money printing.
  • Volatility: CBDCs will be tied to assets like gold, so they will not experience the same level of volatility as cryptocurrencies.

Need for CDBC

In May 2020, China began testing the Digital Yuan (Digital Renminbi) (RMB). CBDC research and pilot trials have begun in Canada, the United States, and Singapore, among other places. In addition, with the introduction of new-age financial goods, China and the US are vying for market dominance, and India may become engaged in this digital proxy war.[3]

Furthermore, in India, there is a significant disparity in the number of bank accounts and mobile phone connections, which CBDC may be able to close.

  • The Digital Rupee gives India the potential to build the Digital Rupee as a superior currency for commerce with its strategic partners, eliminating India's reliance on the dollar.
  • It would also assist India in combating malpractices such as tax evasion, terror funding, money laundering, and other financial crimes, as the central bank will monitor each unit of digital currency.
  • The CBDC will give the RBI more influence over monetary policy. Instead of depending on commercial banks to make modifications when they see appropriate, these consequences of monetary policy may be promptly reflected. 
  • It would also enable the RBI to track transactions and credit flows across the Indian economy, eliminating scams and frauds in real-time and protecting depositors' funds.
  •  CBDC will also divert investors' attention away from the existing high-risk crypto assets.
  • It will also transform every significant technology firmly into a fintech firm, eliminating the need for authorisation or a bank collaboration. It will give financial support to those at the mercy of banks and provide incentives for businesses.
  •  It will also use programmable smart contracts to make loans, insurance, stocks, and other financial products a natural extension.

How CBDC will work in Indian

The notion of a central bank digital currency, or CBDC, has piqued attention throughout the world, with most central banks actively studying and examining CBDCs, which experts believe might be the currency of the future.

The Reserve Bank of India (RBI) is in the process of developing a staged implementation approach for a CBDC, with the pilot expected to begin by the end of this year.

Mihir Gandhi, partner and leader–payments transformation, PwC India, and Vivek Belgavi, partner and leader, fintech, PwC India, have published a paper titled 'Central Bank Digital Currency in the Indian Context,'[4] in which they analyse several CBDC concepts and use cases.

In the Indian context, the financial advice company has outlined four significant CBDC use cases.

  • Payments that can be programmed- CBDC might be used to create 'fit-for-purpose' money that can be used to pay for social benefits and other specific payments in a country. In such circumstances, the central bank can pay pre-programmed CBDC to the authorised recipients, which can only be used for a certain purpose. For example, pre-programmed CBDC might be delivered as a direct benefit transfer for LPG subsidies (DBT).
  • Cross border remittance- CBDCs might be utilised for speedier cross-border remittance payments, according to PwC India. Collaboration among the world's major economies, including India, might aid in the development of the essential infrastructure and arrangements for CBDC transmission and conversion.
  • Payments in the retail sector- Payment instruments might be accessible for CBDC-based payment transactions. Furthermore, a CBDC's universal access features might include making payments offline. CBDC's underlying technology, along with the currency's digital character, makes it superior to existing digital payments, according to PwC India. Because of its irrefutable character can give irrefutable proof of ownership when paired with ownership record transfers.
  • MSME financing- With the aid of CBDC, instant financing to micro, small, and medium companies (MSMEs) in India is available. Banks will create a more realistic borrower risk profile as more MSMEs employ CBDC. This may be utilised to address MSME finance needs quickly. Furthermore, the central bank may promptly transfer stimulus to MSMEs, according to Gandhi and Belgavi in their article. Cyber-attacks and threats, danger to monetary sovereignty, disintermediation of banks, the risk to financial inclusion, and harm to privacy are all possible hazards, according to PwC India.


The Digital Rupee will assist RBI in attaining financial inclusion, transitioning to a cashless society, and lowering the cost of producing and managing currency, among other things. As a result, establishing a Digital Rupee is required since it will empower citizens and enable them to build the digital economy, effectively ending the present banking system.

[1] Deposit Insurance To Be Paid Within 90 Days Of Bank .... https://www.bloombergquint.com/business/depositors-to-be-paid-within-90-days-of-bank-distress-says-sitharaman

[2] What is CBDC and how will it work?. https://timesofindia.indiatimes.com/business/cryptocurrency/blockchain/what-is-cbdc-and-how-will-it-work/articleshow/86585888.cms

[3] https://www.outlookindia.com/website/story/business-news-what-is-cbdc-why-does-rbi-see-it-as-a-future-currency/403375.

[4] https://www.pwc.in/industries/financial-services/fintech/dp/central-bank-digital-currency-in-the-indian-context.html

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