Indian Reserve Bank (RBI) launched the first pilot project to produce digital rupees for wholesale distribution on Tuesday (November 1), which is known as Central Bank Digital Currency (CBDC), which is a digital currency issued by the central bank of India.
It has significant similarities to banknotes, but it is likely to be easier, faster, and more affordable because it is a digital format. Additionally, it has all the benefits of digital money in terms of transactional convenience.
Nine eminent banks have been chosen to take part in the experiment. State Bank of India (SBIN), ICICI Bank (ICICI BANK), Union Bank of India (UNION BANK), HDFC Bank (HDFC BANK), Kotak Mahindra Bank (KOTAK BANK), Bank of Baroda (BANK BARODA), Yes Bank (YES BANK), IDFC First Bank (IDFCFIRSTB), and HSBC are those institutions (HSBA).
What is Digital Currency
“Digital currency is basically payment systems which involve digital transactions in electronic form and is not physically tangible like rupee,” said Rachit Chawla, CEO of Finway.
“CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer). It is a sovereign currency in an electronic form and it would appear as a liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form, and use of a CBDC can be molded for specific requirements. CBDCs should be exchangeable at par with cash,” according to the RBI website.
The digital rupee (₹) will be issued as virtual money for the purchase of government securities. The currency will exist only digitally, exactly like other cryptocurrencies, but the Reserve Bank of India will regulate it, so it won’t be decentralized (RBI).
The Indian government will embrace and fully legalize the digital rupee. Two stages make up the launch process. The digital rupee has been introduced for wholesale or big transactions for the first time during this test period.
How does a currency work?
“In modern economies, the currency is a form of money that is issued exclusively by the sovereign (or a central bank as its representative). It is a liability of the issuing central bank (and sovereign) and an asset of the holding public. Currency is fiat, it is legal tender. Currency is usually issued in the paper (or polymer) form, but the form of currency is not its defining characteristic,” according to RBI website.
How does CBDC serve a purpose?
According to RBI website, “CBDCs have some clear advantages over other digital payments systems, as it being a sovereign currency, ensures settlement finality and thus reduces settlement risk in the financial system. CBDCs could also potentially enable a more real-time, cost-effective seamless integration of cross-border payment systems. India has made impressive progress in innovation in digital payments. The payment systems are available 24X7, 365 days a year to both retail and wholesale customers, they are largely real-time, the cost of transaction is perhaps the lowest in the world, users have a wide array of options for doing transactions and digital payments have grown at an impressive CAGR of 55% over the last five years. Different jurisdictions have justified the adoption of CBDC for very diverse reasons. Some of them are enumerated below:
i.Central Banks, faced with dwindling usage of paper currency, seek to popularise a more acceptable electronic form of currency (like Sweden);
ii. Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, Japan, or even the US);
iii. Countries with geographical barriers restricting the physical movement of cash had the motivation to go for CBDC (e.g. The Bahamas and the Caribbean with small and large numbers of islands spread out);
iv. Central Banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private money.”
Although there is a lot of interest in CBDCs, few nations have been able to establish their CBDCs past the pilot level. sources:rbi.org
Are there any specific objectives for launching Digital Rupee?
India’s advancement in the battle for virtual currencies is the main goal of the Reserve Bank of India’s (RBI) pilot project on digital currency. This is also due to the rising popularity of cryptocurrencies.
Customers will have continuous access to the payment system, whether they are wholesale or retail. Direct payments from Indian customers reduce transaction costs and enable real-time account settlements. Additionally, employing a digital rupee will expedite international trade and remove the requirement for opening a bank account.
“This will also help direct payments from Indian customers, reducing transaction costs and enabling real-time account settlements. A digital rupee will expedite cross-border transactions and remove the requirement for opening a bank account,” said Mahesh Shukla, CEO & Founder PayMe.
Since the digital rupee would increase efficiency and transparency due to the usage of blockchain technology, the debut will surely revolutionize the game. Blockchain will also enable ledger maintenance and real-time tracking.