As part of the presentation of the Union Budget for FY 2022–2023, the finance minister of India announced the creation of an Indian digital currency by the RBI. By utilizing blockchain and other technologies, the “Digital Rupee” would provide “a major boost” to the nation’s digital economy in 2022–2023.
There is a push for central banks worldwide to adopt the national digital currency system. The RMB in China was among the first digital currencies issued by a significant economy. The Nigerian CBDC was announced as the first of its kind in Africa on October 25, 2021. Several advantages and disadvantages have been discussed in a recent paper published by the Federal Reserve Board regarding a potential CBDC.
The Reserve Bank of India (RBI) is working to operationalize India’s Central Bank Digital Currency (CBDC) by FY2023. Almost a year after they were introduced, Central Bank Digital Currencies (CBDCs) have become mainstream discussion topics.
What is Central Bank Digital Currency (CBDC)?
In the RBI’s definition, CBDC is a legal currency issued by a central bank in digital form. There is no difference between it and fiat cash since it is interchangeable one-to-one. There is only one difference between them: their form. With the help of blockchain wallets, you can transact with digital fiat currency or CBDC.
While Bitcoin directly influences CBDCs, they differ from decentralized virtual currencies and crypto assets, which aren’t issued by the government and don’t qualify as “legal cash.” With CBDCs, users can use no third party or bank to conduct international and local transactions.
What is the benefit of CBDC?
As a minister of state for finance, Pankaj Chaudhary stated last year in a statement to the Lok Sabha that CBDC could deliver significant advantages, including reduced reliance on cash, increased seigniorage, reduced settlement risk, and reduced transaction costs. Additionally, CBDC may result in a more reliable, efficient, regulated, and legal tender form of payment.
He states, “There are also associated hazards that need to be carefully considered in light of the possible benefits.”
Operating principles of digital currencies
According to Chaudhary, the Reserve Bank of India (RBI) has proposed changes to the Reserve Bank of India Act, 1934, which would establish a CBDC. However, according to government plans, with “limited exceptions,” public cryptocurrencies would be prohibited in India under a Bill introduced in Parliament.
In October 2021, the Reserve Bank of India proposed to the government that the Reserve Bank of India Act, 1934, be amended to incorporate digital money into the definition of a banknote. A phased implementation approach is being developed to implement CBDC with minimal interruption, Chaudhary informed the Lok Sabha.
What was the need for digital currency?
Money laundering, terrorism funding, tax evasion, etc., are regularly attributed to private cryptocurrencies such as Bitcoin, Ether, etc. Therefore, CBDC’s launch has been seen to balance digital money’s advantages and disadvantages.
Reserve Bank of India said in its annual report on Friday, May 27, that it would implement the Central Bank Digital Currency in a “graded manner.” A virtual representation of a fiat currency, the Central Bank Digital Currency (CBDC) will become part of a select group of nations with this technology.
In its annual report for FY 2021–22, the Reserve Bank outlined a graduated approach for implementing CBDC, starting with Proof of Concept, piloting, and launching. During a proof of concept experiment, the goal is to verify that an idea works as expected or to see if it can be implemented.
An overview of the legislative framework
In its annual report, The Reserve Bank examined the advantages and disadvantages of CBDC’s adoption in India. An effective payment and currency system function can only be achieved through the design of the central digital coin. This has led to the development of the optimal CBDC design components that are capable of being deployed without causing significant disruptions.
In its budget for 2022–2023, the Union Budget announced the implementation of CBDC, while the Finance Bill for 2022 amends the RBI Act 1934 to complement CBDC. A legislative framework for CBDC was adopted in the Finance Bill 2022, noted by the RBI in its annual report. India has established legal frameworks for digital currency through the Finance Bill 2022.
Several crypto-related topics have been discussed by the Reserve Bank of India (RBI) in recent times, including private cryptocurrencies and the central bank’s digital currency. To use its own digital currency, the central bank has experimented with ways to do so. Private cryptocurrencies, however, have been criticized by the government.
The Step By Step Process
As the RBI governor Shatikanta Das previously said, “cryptocurrencies are a major concern from a macroeconomic and financial stability standpoint.” Currently, CBDCs are primarily in the hypothetical stage; however, some are participating in proof-of-concept programs.”
A CBDC is a form of legal tender issued by the central bank. There is no difference between it and fiat money; it is interchangeable one-to-one. The only thing that distinguishes CBDCs from regular cash or fiat money is their digital nature. In addition, the Indian government is considering legalizing CBDC in both wholesale and retail forms.
When defining CBDC a year before, the RBI said that it was not analogous to private virtual currencies that have exploded over the past decade. Instead, there will basically be a Reserve Bank of India-backed digital rupee displayed in the form of a digital currency.
Conversely, the retail frenzy surrounding private cryptocurrencies has quickly assisted central banks in setting up CBDCs. However, CBDCs cannot be used as a direct substitute for private cryptocurrencies due to their many functions.
In contrast to Bitcoin, which is a cryptocurrency based on the underlying blockchain technology and allows users to remain anonymous, the official digital currency will have the support of the RBI.
By creating a central bank digital currency based on blockchain technology and taxing virtual digital assets at the maximum rate of 30%, speculative activity will be reduced, particularly in cryptocurrency. In the budget, the Finance Minister announced that starting in April 2022, virtual currencies will be taxed at 30%.
RBI has established an Innovation Hub
Reserve Bank Innovation Hub (RBIH) was created as a wholly-owned subsidiary to foster sustainable and institutional innovation. There are independent directors on the RBI Innovation Hub’s Board of Directors, including robust business and academic leaders. It is headquartered in Bengaluru, India.
Through RBI Innovation Hub, ideas will be exchanged, and prototypes will be developed to create an eco-system that will advance financial inclusion and promote access to financial services and products. In order to achieve this, multiple institutions from the financial sector, technology, industry, and academia will collaborate. Additionally, it would enable the interaction between businesspeople and innovators and provide the internal infrastructure for FinTech research.
The inherent ability of central bank digital currency to alter the transfer of value will make it a more competitive, effective, and durable payment system for individuals, businesses, and economies.
As with the real rupee, India’s sovereign-backed CBDC, or digital rupee, would benefit from the latest technological advances and have the same characteristics and degree of confidence. Cost-effectiveness, transparency, security, and efficiency are predicted to be improved. India is not the only country striving to implement a digital legal tender system. The digital dollar, e-yuan, and euro are among initiatives being experimented with by several global central banks.
There will be a game-changing impact on the Indian economy with the introduction of the “Digital Rupee” (CBDC). This will improve the efficiency and affordability of money issuance and circulation. In addition to creating new opportunities for creativity, financial efficiency, and a healthy economy, Blockchain adoption makes Digital India a winner. The next decades will see India become a global financial technology leader due to its foundation.