How will the digital rupee be different from rupee notes?

The boom in digital payments and transactions in India due to the globalized payment system and infrastructure built up over the years may have encouraged the government and the RBI to move on to the Central Bank Digital Currency or CBDC front. So it is natural to ask how a CBDC will be different when digital transactions up to Re 1 can be done through digital wallets, UPI, cards and other platforms. Currently, central banks like RBI issue currency in physical form through notes and coins. All of them are backed by government securities or gold, which provide safety and security to the users or the public and provide easy transferability.

Digital modes of payment and transactions also provide easy. But the difference is that when a shopkeeper transacts with a customer, a settlement process is involved at the back-end. That agreement happens with a short interval. But in a digital currency transaction, such as between you and a local street vendor, it will happen immediately after accessing your digital account if the central bank is one or through banks or other financial sector firms to open such digital accounts or accounts. is authorized. , There is no such agreement in the case of other digital payment modes. This assumes that both the customer and the seller have a virtual account. CBDC eliminates the need to carry currency notes or coins in your wallet. The entire process will be made possible using blockchain technology. The need for ATMs may decrease over time.

Theoretically, this speed of transactions could further accelerate the pace of economic activity or money supply – a metric central bankers and monetary economists see.

So, what’s in it for individuals, homes or businesses? Convenience for one. In addition, like physical currency, digital currency is backed by a central bank that has more liquidity and security and comfort. For businesses, it could offer faster payments and perhaps at a much lower rate if the RBI is able to ensure that infrastructure costs are competitive.

But broadly speaking, a digital currency is meant as a substitute – such as a digital wallet, credit or debit card, instant payment services or electronic fund transfers. So physical currency will not disappear or be replaced in a hurry, especially in a country with millions of unbanked and low financial literacy or awareness. In future, RBI and other central banks will continue to provide physical currency along with the digital rupee.

As for RBI, its balance sheet will not sport a different form with digital currency such that physical currency is treated as part of its liabilities. But more importantly, if the digital currency accelerates or volumes increase, the burden on central banks will be less. This is because of the challenges and costs involved in distributing currency across the country, not only for the RBI but also for the banks maintaining currency chests across the country.

There are also risks arising from digital currency. Consumers’ privacy is certainly a concern, given that in the case of banknotes, virtual accounts can be tracked – something that even RBI Governor Das acknowledged on Thursday. So in the digital world there is a danger of hacking, cybercrime. It is therefore not surprising that most central banks are working to address these and find the right balance. And in India, the added challenge of creating awareness, education and better digital connectivity.

Like its global peers, the RBI may well start with pilot projects and assess whether the benefits outweigh the risks before unveiling its CBDC – perhaps the 2023 rollout date announced by the finance minister. much later than