The Reserve Bank of India (RBI) recently floated a bill proposing the issuance of a Digital Currency by the central bank. The new currency would be an official, national currency, and would promote the technology that underlies cryptocurrencies. However, the central bank is reluctant to issue a Digital Currency in India, fearing that it will lose control of the new currency. Instead, it aims to promote other use cases for blockchain.
If digital currency becomes the norm in India, it will be beneficial to banks as they will be able to create fewer loans. This will force them to give up some cash. Moreover, digital currencies have the advantage of being easier to track and control, which may reduce the use of physical cash. Despite the benefits, digital currencies have raised privacy concerns. The RBI should carefully consider the feasibility of such an initiative before proceeding.
It will require a completely new ecosystem. A centralized payment system would be managed by the RBI, with a digital wallet linked to it. The digital wallet could reside on prepaid cards, smartphones, or other electronic devices. Digital money can be spent just as easily as physical cash. The only difference between a physical and digital currency is that the digital version would have a central bank. This way, the value of the Digital Rupee will remain stable and the value of a digital currency will remain low.
The Modi government has recently signalled its plans to clamp down on most cryptocurrencies in the country. The RBI has warned that private cryptocurrencies are dangerous because they may cause financial instability. In fact, Sitharaman has been meeting with senior finance ministry officials and Ministers of State. However, he believes the RBI should issue an official Digital Currency in India. In addition, a central bank digital currency would help to keep speculative activities in check, but could also present compliance issues for crypto businesses.
The issue of security is also a big concern. The CBDC model is much safer than traditional banks, which may have to raise interest rates to attract consumers. And it will affect the central bank’s lending power and profitability. This would require technological improvements. But in the meantime, the question of who will control the currency should be asked: Should the central bank issue a CBDC? This is a complex question with no clear answer.
The digital rupee will be separate from private virtual currencies in two ways. First, it will have intrinsic value. Second, it will be backed by the government. In other words, it will have a legal tender status and can be used for transactions. Third, it will make it easier for the government to fight counterfeit currency and maintain a stable currency management system. Lastly, it will save banks a lot of money by eliminating the need to rely on banks as intermediaries. With the help of Blockchain technology, the RBI will be able to keep control of digital currency in India.
As of this writing, there is no set timetable for issuing a CBDC in the United States, but the Fed has opened up public discussion of the topic. Nine countries have fully implemented a CBDC. The RBI is expected to introduce the Digital Rupee sometime in the 2022-2023 financial year, beginning April 1, 2022. This makes India one of the largest economies to issue a CBDC.
The introduction of a CBDC may help reduce the currency to GDP ratio in India. Moreover, a Digital Currency will have the backing of the RBI, making it as good as the physical rupee for all transactions. The government will be able to ensure that the digital currency is backed by the central bank. This will eliminate the anonymity associated with anonymous transactions, ensuring that the digital currency will be as legitimate as the physical rupee.
In addition to facilitating financial inclusion, a CBDC could also be a prelude to targeted cash transfers. It could improve fiscal and monetary policy coordination, encourage financial innovation and entrepreneurship, and make cross-border transactions easier. In addition to its benefits, the growth in interest in CBDC has been fueled by changes in payments and finance and disruption caused by COVID-19. And given its many advantages, the introduction of such a currency is sure to be a major step forward for the country.