All you need to know about RBI’s digital currency

What is a central bank digital currency?

A central bank digital currency (CBDC) is legal tender issued in digital form by a central bank. It is similar to fiat currency and is exchangeable one-to-one, differing only in form. Globally, central banks are exploring digital currencies to counter the rise of private digital assets such as cryptocurrencies, from popularizing the use of electronic currency. A 2021 survey by the Bank for International Settlements (BIS) found that 86% of central banks were actively researching the potential of CBDCs, 60% were experimenting with the technology, and 14% were deploying pilot projects. Were were

How is it different from digital payment?

The primary difference between a CBDC and other forms of digital payments is that payments made using the former are final in nature and reduce settlement risk in the financial system. Essentially, it is the digital equivalent of purchasing goods and services using cash, where there is no need for inter-bank settlement. Therefore, transactions using a CBDC will allow for an even more real-time payment system. As the RBI points out, an Indian importer may be able to make payments to his US exporter in digital dollars on a real-time basis without the need for an intermediary. This transaction will be final.

How prepared is India to implement this?

Finance Minister Nirmala Sitharaman had said on February 1 that RBI would introduce CBDC in FY23. RBI has made public its plan to introduce digital currency in a phased manner. RBI Deputy Governor T. Rabi Shankar said in December RBI made significant progress on the wholesale component of CBDCs, while the retail component would take longer.

What are the risks to digital currencies?

RBI Governor Shaktikanta Das has expressed concern over the risk of fraud in digital currencies, pointing to the need for systems to thwart malicious attempts. Another risk, of course, is the technical challenges involved in storing and transacting such CBDCs by retail customers. This depends on the availability of strong internet connectivity and widespread access to technology to store and use CBDCs. There are other disadvantages as well. RBI is also concerned that low-level technology adoption in developing countries may limit the reach of CBDCs.

Will it be useful in India?

According to RBI’s Rabi Shankar, CBDCs are unlikely to replace cash usage for those who prefer cash due to the inconvenience with digital payments. Nevertheless, those who prefer cash to anonymity may be redirected to CBDC approval, as long as anonymity is assured. It can also be useful for those who have been excluded because of India’s domestic payment system, unified payment interface, lack of debit cards, the need to register and transact on the platform.