What is Digital Rupee, when will it come and how’s it different from private cryptocurrencies?

Union Finance Minister Nirmala Sitharaman on February 1 said the Reserve Bank of India (RBI) would launch a central bank digital currency (CBDC) in 2022-23, marking the first official statement from the Union government the launch of the much-awaited digital currency.

The FM said the introduction of CBDC will boost the digital economy, and it will be based on blockchain technology. The Reserve Bank of India (RBI) had earlier indicated that CBDC is on the cards even as the central bank is against the idea of permitting private virtual currencies.

The FM said the introduction of CBDC will further enhance India’s status as a digital economy, given its world-class digital payments system.

  1. What is a CBDC?

A central bank digital currency is the legal tender issued in digital form. It is the same as a fiat currency, but the form is different and is exchangeable one-to-one with government-issued money. In other words, CBDC is the same as the legal currency we use, just that it’s in a digital form.

  1. How does Digital Rupee work?

A CBDC is the digital form of fiat currency and will ease transactions. An RBI report had earlier described CBDC as providing a safe, robust, and convenient alternative to physical cash. The RBI report said that various design choices could also assume the complex form of a financial instrument.

  1. Is CBDC a cryptocurrency like Bitcoin?

No. A CBDC is not a private cryptocurrency. It is a digital form of legal tender, and personal virtual currencies are entirely different. Private virtual currencies are at substantial odds with the historical concept of money. They are not commodities or claim items as they have no intrinsic value.

  1. How does RBI respond to claims that private cryptos are assets like gold?

The RBI had said that private virtual currencies do not represent any person’s debt or liabilities. “There is no issuer. They are not money (certainly not currency) as the word has come to be understood historically,” said RBI Deputy Governor T Rabi Sankar on July 22. What this effectively means is that, according to the RBI, no banking entity can treat private virtual currencies as assets or liabilities for transactions.

  1. What is RBI’s view on CBDC?

Sankar said the introduction of CBDC can provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk.

It will also possibly lead to a more robust, efficient, trusted, regulated, and legal tender-based payments option, Sankar said.

  1. What is RBI’s take on CBDC vis-a-vis private cryptocurrencies?

Sankar said the advent of private virtual currencies might well be another reason why CBDCs may be necessary. “It is not clear what specific need is met by these private virtual currencies that official money cannot meet as efficiently, but that may in itself not come in the way of their adoption. If these virtual currencies gain recognition, national currencies with limited convertibility are likely to come under threat,” Sankar said.

  1. What are the risks associated with CBDCs, according to RBI?

Sankar outlined certain risks associated with CBDCs, saying the availability of these currencies will make it easy for depositors to withdraw balances if there is stress on any bank. “Flight of deposits can be much faster compared to cash withdrawal,” Sankar said.

On the other hand, just the availability of CBDCs might reduce panic “runs” since depositors know that they can withdraw quickly. One consequence could be that banks would be motivated to hold a more significant level of liquidity, resulting in lower returns for commercial banks, the deputy governor said.

  1. When is RBI planning to introduce CBDC?

The FM has announced the Digital Rupee launch in the Budget speech. After Cabinet’s approval, the government will ask the central bank to start the launch. The RBI has already begun the groundwork. The Digital Rupee is expected to hit the ground sometime this year, going by the comments of the government and RBI.

  1. What is the future of private virtual currencies in India?

There is no clarity yet on this. The government is working on a bill to regulate cryptocurrencies, but this bill is not listed for the ongoing Budget session. Until the government comes clear on regulation, the central bank is likely to remain in a wait-and-watch mode as far as private virtual currencies are concerned.

  1. The government announced a 30% crypto tax. What does it mean?

The government announced taxing private digital assets at 30 percent, which is widely seen as an indirect recognition of the existence of these instruments. But, it doesn’t mean that these assets are legally recognized in the true sense. There is a debate on this point. At the same time, CBDC may happen sooner, going by the indications available so far.

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