While presenting the Union Budget for the year 2022-2023, Ms Nirmala Sitharaman announced that the Reserve Bank of India will launch its own Digital Rupee this year. Along with these, the Finance Minister has also emphasised how the CBDC (Central Bank Digital Currency) would help in shaping the Indian digital economy.
Since then, ‘Digital Rupee’ has become a trending topic amongst each of us, and we are excited to know what is digital rupee? So, let us dig into more details about the ‘Digital Rupee’ and clear a lot of questions.
What is Digital Rupee/CBDC?
The Digital Rupee or CBDC is the digital form of regular currency launched by the Reserve Bank of India (RBI) in the financial year 2022-2023. The Digital Rupee by RBI will help you store the currency in a digital and more secured format which can further be used for daily transactions.
Powered by blockchain technology, the RBI Digital Rupee:
- Makes currency management cheaper.
- Allows the government to print fewer money notes in the future.
- Since it is operated digitally, there are fewer chances of destroying its digital form, which in turn increases its lifespan.
Besides, as the Digital Rupee/Indian Rupee Digital Currency serves as an electronic record of a country’s official currency, it also tends to fulfil the basic needs of a country’s currency such as:
- A medium of exchange
- Unit of account
- Standard of deferred payment or
- Store of value
According to the RBI, CBDC is similar to the currency that is issued by the Central Bank but will take a different form other than a paper. So, CBDC is a sovereign currency which is available in electronic form and will appear as a liability when placed on the central bank’s balance sheet. Due to its valuation methods, CBDC differs from other blockchain-based assets. Also, remember that CBDCs can be exchangeable at par with cash.
Difference Between Digital Currency and Cryptocurrency
Cryptocurrency in India is unregulated. The value of a single unit of cryptocurrency is mainly decided by its demand and supply and is controlled by the private entities on the cryptocurrency blockchain. The demand and supply of cryptocurrencies increase with usability. Hence, the process of ‘mining’ creates new opportunities for additional currencies.
When it comes to CBDCs, the Government will monitor and control the value and the supply of the digital rupee price.
So, cryptos are virtual currencies, which are private assets, and CBDCs are virtual sovereign currencies.
How Does a Digital Rupee Work?
Even though the digital currency is powered by blockchain technology, it will be monitored by the Central Bank. The digital rupee by RBI is another form of fiat currency, and in the future, it could shoot digital payments to a new level.
Digital Rupee vs UPI
India’s CBDC or digital rupee and UPI are two very different forms of the Indian rupee. For example, the balance in your UPI/digital wallet will be created only when you add money to the wallet from your bank account. So, this balance is a part of the total money that is owned by you but in a different container.
Here, the balance in your bank account is an electronic representation of money that you have earned and exists in tangible form. So, you can withdraw and receive physical currency or cash in exchange.
But on the other hand, Digital Rupee will be the direct currency instead of the representative currency as discussed above. So, we can conclude that RBI Digital Rupee is a new and different form of legal tender that is issued by the Government of India.
Digital Currency Advantages
- Since the Indian Rupee will be accessed in digital form, the fund transfer will be fast.
- When compared to other existing forms of money, the Digital Rupee offers benefits to consumers in terms of scalability, liquidity, acceptance, ease of transactions, and faster settlements.
- Physical materials eventually degrade, and the costs incurred during the process of creating the tangible currency can be reduced. The cost of managing and transporting the physical currency will also be saved.
- Digital Rupee is secure in multiple dimensions. If you consider the physical form of currency, it would lead to theft, but the blockchain technology involved for the Digital Rupee would make tracking and finding the fraud easier.
Will the Digital Rupee Replace the Traditional Rupee?
The answer is NO! Indian Rupee Digital Currency is another legal currency which aims to curb counterfeit currency and create a better and cheaper currency management system.
It does not need a bank intermediary to manage online transactions but will rely on blockchain technology with RBI as its guarantor.
How Will CBDC Bridge Global Differences?
- Creates a more real-time and cost-effective payment system globally.
- Without the need for an intermediary, an Indian importer can pay digital dollars on a real-time basis to its American exporter.
- Time zone differences will no longer be an issue when it comes to currency settlements.
The concept of Central Bank Digital Currency (CBDC) has been gaining popularity for some time. Out of 87 countries that are looking into the prospects of CBDC, 14 countries including China & Korea, are gearing up to bring their CBDC soon. The idea of the RBI Digital Rupee is still in the process, and only time can determine its potential.
1. What is the need for Digital Rupee?
Due to many serious concerns over money laundering, tax evasion, terror financing, etc. with private cryptocurrencies, the RBI has indicated that it will announce its own digital rupee.
2. Can I trade with a digital rupee?
Unlike the Indian rupee, you won’t need a bank account to transfer money. Since the Digital Rupee is based on Blockchain technology, it is easy to transfer the digital currency to another person’s digital rupee wallet.
3. In future, what will a digital rupee replace?
A digital rupee will replace physical cash. A digital currency is the digital version of fiat currency and has no physical presence. In that case, it will be a perfect replacement for cash for an economy.
4. Who will issue the digital currency in India?
The Reserve Bank of India will issue the Digital Rupee in the financial year 2022-2023.
5. What are some examples of digital currency?
Bitcoin, Ethereum, Mana are some examples of digital currencies, which are considered virtual currencies as they are unregulated and are available only in digital form.