Central Bank Digital Currency in India: Everything We Know So Far
The Reserve Bank of India, the country’s banking regulator, provided an update to its implementation of a digital currency, which is expected to materialize by end of 2021. The central bank-authorized digital or electronic currency will be a legal tender unlike cryptocurrency.
On July 22, 2021, India’s central bank, the Reserve Bank of India (RBI), announced that it is working on a strategy for the phased implementation of a Central Bank Digital Currency (CBDC), which is expected to materialize by the end of 2021. The CBDC announcement, hailed by investors, comes long after the RBI’s repeated warnings against investing in cryptocurrency in the country.
The RBI also clarified that the CBDC, as a legal tender, is different from other private digital/virtual currencies like bitcoin, dogecoin, ethereum etc. that have mushroomed over the last decade. It is interesting to note that central banks across the world, including in the US, European Union, and China, have been working towards issuing their own digital currency ever since the spectacular rise in the value of privately issued cryptocurrency. In October 2020, the Bahamas became the first country to issue CBDC.
What is the Central Bank Digital Currency or CBDC?
CBDC is a legal tender, which 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 it will appear as liability (currency in circulation) on a central bank’s balance sheet. It is the same as a fiat currency and is exchangeable on a one-to-one basis with the fiat currency.
The underlying technology, form, and use of a CBDC can be molded for specific requirements. The RBI is empowered to launch new forms of legal tender in India and once the implementation of CBDC is worked upon, necessary consequential amendments to legislation like The Coinage Act, 2011, Foreign Exchange Management Act (FEMA), 1999, and the Information Technology Act, 2000 etc. will be made.
Projected to possess characteristics of both centralized as well as decentralized money, in terms of security offered as well as anonymity, this token based currency has been touted by many as the future of money in the world.
What is the rationale for the RBI introducing digital currency in India?
The primary reason for this push is the increasing urgency among the world’s central banks to protect their monetary authority in the wake of a burgeoning surge in the circulation of private and commercial cryptocurrency.
In India too, investors appear to be liberally exploring newer avenues for maximizing their returns and cryptocurrency activity has recently begun heating up in the country. This increasing mainstream interest in cryptocurrency intensified during the pandemic, supported also by the increased internet penetration across the country.
According to Nischal Shetty, CEO of WazirX, India’s largest currency exchange, business in the first half of 2021 grew more than 12 times, and the number of users on the platform quadrupled to reach 6.5 million, projecting the upward trajectory that digital currency is bound to tread in the near future.
The RBI, which until recently had been reluctant to give recognition to privately circulated digital currency, has now chosen to increase its pace on launching its own legal digital currency – an undertaking that has been in the research period for a few years now.
Apart from the obvious need to prevent the erosion of its monetary authority, the RBI has outlined the following justifications for the introduction of CBDC:
- India is currently leading the digital payments innovation system in the world, having grown at a compound annual growth rate (CAGR) of 55 percent in the last five years. However, cash still remains the most preferred mode of payment in India owing to its anonymity. CBDC has the potential to transform the digital payment landscape in India, while remaining anonymous at the same time.
- CBDCs can also substantially reduce the cost of printing, transporting, storing, and distribution of currency.
- It is noted that countries with significant physical cash usage are now looking for options to make issuance more efficient and CBDC has the potential to address this issue.
- CBDCs also tend to have advantages over other digital payments systems as payments using CBDCs are final and thus reduce settlement risk in the financial system.
- In future, CBDCs are expected to enable a more real-time and cost-effective globalization of payment systems.
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