In the Union Budget for 2022-23, Union Finance Minister Nirmala Sitharaman mentioned the introduction of a Central Bank Digital Currency (CBDC), also known as the Digital Rupee. The announcement has since been a source of contention.
RBI Digital Rupee
Bitcoin and blockchain technology have heightened public interest in cashless societies and digital currency. Governments and central banks all across the world are investigating the usage of government-backed digital currencies.
This Digital Rupee is a digital currency issued by a central bank (CBDC). CBDC is the central bank’s digital currency, according to the RBI website.
Simply put, the CBDC will be a digital equivalent of the Indian rupee. When the RBI starts issuing digital rupees, ordinary people like you and me will be able to use them just like normal rupees. Digital rupees are represented by NEFT, IMPS, and digital wallets. It has the potential to be utilised for both wholesale and retail transactions.
Digital Rupee v/s cryptocurrency
The blockchain, which underpins Bitcoin and the majority of other cryptocurrencies, maintains a tamper-proof record of transactions and ownership. They are usually decentralised, which means they operate without a centralised authority like a bank or government.
The digital rupee, as previously indicated, is a Central Bank Digital Currency and will be centralised, as opposed to private cryptocurrencies such as Bitcoin and Ethereum. The digital rupee will also be legal cash; however, Bitcoin and other cryptocurrencies have been labelled “virtual assets,” which means they will not be acknowledged as legal tender.
Need for Digital Rupee
One of the primary motivations for the RBI’s intention to issue a digital rupee is that India does not want to fall behind in the virtual currency race. The RBI has already expressed “severe worries” about the use of private cryptocurrencies for money laundering, terrorism financing, tax evasion, and other objectives, and has hinted that it will issue its own CBDC.
“The adoption of central bank digital currency will provide the digital economy a significant boost.” “Digital currency will also be a more cost-effective and efficient currency management system,” said Finance Minister Nirmala Sitharaman in her Union Budget address.
The proposed taxation of virtual assets has sparked a debate concerning the legality of cryptocurrencies in India. While many have praised the government’s decision to tax digital currencies, many believe it is simply the first step toward recognising virtual currencies; the government has yet to explain if currencies like Bitcoin are legal tender in India.
During a post-budget press conference, Sitharaman stated that consultations on crypto regulation are ongoing, adding that once the regulatory document is finalised, it would be clear what is legal and what is not.
Advantages of CBDC digital payment
CBDC payments are final, lowering the risk of financial system settlement. CBDC will take the place of interbank settlement. It’s similar to the UPI system, but instead of bank balances, it uses CBDC.
CBDCs may also allow payment systems to be more real-time and cost-effectively globalised. An Indian buyer might pay its American exporter in digital Dollars in real-time without the use of an intermediary.
This transaction would be definitive, just like giving over cash, and there would be no need for the United States Federal Reserve system to be open for settlement. Time zones would no longer be a role in currency transactions.