What is CBDC? Why Do We Need It in India?

The central bank digital currency is expected to lower the economy’s reliance on cash.

Digital Rupee. Representative image.

(Photo :iStock)

sThe Reserve Bank of India is considering launching a central bank digital currency in a 'phased manner', informed T Rabi Sankar, the deputy governor of RBI, at a conference held by a think tank, Vidhi Centre for Legal Policy, on Thursday, 22 June.

The digital currency, backed by RBI, will lower the economy’s reliance on cash, enable cheaper and smoother international settlements, and protect people from the volatility of private cryptocurrencies, he said.

We attempt to break down what CBDC is and how soon it will be implemented in India.

What is CBDC?

A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency – only its form is different.

It is also important to understand what a CBDC is not.

CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies such as Bitcoin and Ethereum. Private virtual currency have no legal issuers and therefore cannot be considered legal tender or currency, whereas the CDBC can be.

"They (cryptocurrencies) are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic. Usually, certainly for the most popular ones now, they 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 Sankar at a conference.

Do We Need CBDC in India?

The adoption of CBDC has been justified for the following reasons:

• Central banks, faced with dwindling usage of paper currency, seek to popularise a more acceptable electronic form of currency (like Sweden);

• Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US);

• Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of private currencies.

"India is leading the world in terms of digital payments innovations. Its payment systems are available 24X7, available to both retail and wholesale customers, they are largely real time, the cost of transaction is perhaps the lowest in the world, users have an impressive menu of options for doing transactions and digital payments have grown at an impressive rate."

T Rabi Sankar, Deputy Governor, RBI

What Are The Benefits of CBDC?

Introduction of CBDC has the potential to provide significant benefits, such as:

• Reduced dependency on cash

• Higher seigniorage due to lower transaction costs

• Reduced settlement risk

What is RBI’s Stance on CBDC?

Sankar pointed out that the RBI is currently looking at ways to launch the digital asset for general purposes on a mass population scale.

“RBI has been exploring the pros and cons of introduction of CBDCs since quite some time. Generally, countries have implemented specific-purpose CBDCs in the wholesale and retail segments. Going forward, after studying the impact of these models, launch of general purpose CBDCs shall be evaluated. RBI is currently working towards a phased implementation strategy and examining its use so it could be implemented with little or no disruption to India’s banking or monetary systems", he added.