Towards Digital Rupee

(Mains GS3 : Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development & Achievements of Indians in Science & Technology; Indigenization of Technology and Developing New Technology.)

Context:

• India has played a leading role globally in developing Information Technology (IT) and digital solutions, especially in digital payments and financial inclusion. 
• In the Budget for 2022-23, the Finance Minister had announced the introduction of India’s Central Bank Digital Currency (CBDC) and that the digital rupee would give a ‘big boost’ to the digital economy.

Central Bank Digital Currency:

• CBDC or Central Bank Digital Currency is a legal tender issued by the Reserve Bank of India.
• A CBDC is an electronic record or digital token of a country’s official currency, which fulfills the basic functions as a medium of exchange, unit of account, store of value, and standard of deferred payment.
• According to the RBI website, CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer).
• It is sovereign currency in an electronic form and will appear as liability (currency in circulation) on a central bank’s balance sheet and it should be exchangeable at par with cash.

Digital push:

• Cash is being used less and less as a means of payment, and the surge of online commerce during the COVID-19 pandemic has further accelerated the adoption of digital payments. 
• Central banks worldwide are exploring the potential benefits of Central Bank Digital Currencies (CBDC) in improving cross-border transactions, controlling monetary policy and financial sovereignty, and improving financial inclusion.
• They introduced new technology-enabled characteristics like decentralised consensus mechanisms and scalability, which could become essential for new CBDCs issued by central banks globally.

Different from cryptocurrencies:

• Due to their largely unregulated nature, private cryptocurrencies do not meet several criteria for Anti Money Laundering/Combatting the Financing of Terrorism (AML/CFT).
• Additionally, holders of private cryptocurrency cannot access central banks as a lender of last resort, which greatly accentuates currency and transaction risk.
• There is also a risk of a run on certain stablecoins that are backed by non-cash-equivalent assets that are perceived as a threat to a sovereign currency and a central bank’s ability to control and dictate monetary policy.

Risks associated:

• RBI Deputy Governor flagged the concern that people may begin withdrawing money from their bank accounts as digital currencies issued by Central banks become more popular.
• Many people currently use bank accounts to safely store their cash but when the digital wallet offered by the RBI can serve the same purpose, people could very well begin converting their bank deposits into digital cash.
• The withdrawal of bank deposits can also affect the amount of loans created by banks; however, this could happen not simply because banks will have fewer cash deposits to lend to borrowers.
• The reason banks will be able to create fewer loans is that when customers convert their bank money into CBDCs, banks will be forced to surrender at least some cash and will thus possess an even smaller base on which to create loans.

Conclusion:

• Due to India’s inherent market intricacies and socio-economic conditions, all stakeholders must consider the advantages and disadvantages of the new digital currency.
• Thus, by leveraging the latest technology, central banks can safeguard the finality of transactions, like physical cash and unlike stablecoins or any private cryptocurrency.