On August 22, 2022, RBI stated that the digital currency might be rolled out this year in phases.
When the budget was released on 1 Feb this year, our finance minister, Nirmala Sitharaman mentioned that RBI is expected to launch a new form of currency, that is, digit currency. Since RBI, from time to time, has flagged concerns about private digital currencies, it proposed to the central government to make provisions for bumping up paper currency to include digital currency as well.
What is CBDC?
The RBI states that “CBDC is the legal tender issued in digital form by a central bank’’. It is interchangeable with fiat currency and is the same as fiat currency. Digital currency will be using blockchain mechanisms as well. It eliminates the involvement of third parties while carrying out transactions, that is, it remains between two parties only.
Need to introduce it
“Introduction of CBDC has the potential to deliver major benefits, such as reduced dependence on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk,” said Pankaj Chaudhary, a minister of state for finance, in a statement to the Lok Sabha last year. The use of CBDC might also result in a more reliable, effective, regulated, and legal tender-based payment method. However, he noted, “There are also related hazards that need to be carefully weighed against the potential advantages.”
RBI has regularly been sceptical about the use of private cryptocurrencies like Bitcoin, Dogicoin, etc. in terms of terrorism, tax evasion etc. Its own CBDC launch has been viewed as a method to balance the benefits and risks of digital money.
- The 76 trillion in real-time payments made each year through apps like PhonePe, Google Pay, and Paytm may not be as secure for consumers as an e-rupee.
- The idea of convertibility could be kept grounded in practicality by using electronic money.
- The risk of losses that Indian depositors have when interacting with commercial banks will be reduced by digital currency.
- The goal of CBDC is to combine the security and convenience of digital forms like cryptocurrencies with the controlled, reserve-backed money circulation of the established banking system.
- The foundation of faith in demand deposits, which they convert to cash at face value, may become less real as more transactions take place online.
- Since the Reserve Bank of India Act’s current provisions were written with physical currency in mind, legal modifications would be required.
- The Coinage Act, Foreign Exchange Management Act (FEMA), and Information Technology Act would also need to undergo consequential changes.
- The scope of CBDCs, the underlying technology, the validation procedure, and the distribution architecture are some of the major problems under RBI’s scrutiny.
India will have the chance to liberate its people from an antiquated banking system by introducing a digital rupee that they may freely utilise in our rapidly growing digital economy. But a proper balance needs to be struck between risks and advantages, since there was some exasperation sensed when the announcement was made on February 1. RBI must prepare a proper report before rolling out the policy since although the pros might seem to outweigh the cons, still there the risks are significant enough to create problems.
By Muskaan Jain