Future of New Digital Currency in India
Finance Minister of India, Mrs. Nirmala Sitharaman announced in the budget that the Reserve bank of India will issue a digital currency based on blockchain and related technology starting from the financial year 2022-23. It will be known as Central Bank Digital Currency (CBDC). The finance minister said that the Central Bank Digital Currency (CBDC) will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system.
As per the Keynote address delivered by Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India, the idea of CBDC is not a recent development. Some attribute the origins of CBDCs to Nobel laureate James Tobin2, an American economist, who in the 1980s suggested that Federal Reserve Banks in the United States could make available to the public a widely accessible ‘medium with the convenience of deposits and the safety of currency.’
In the last decade, the concept of digital currency has been widely discussed by economists, central banks, and governments.
Except as money notes, all other use of paper in the modern banking and financial system, be it securities, bonds, transactions, correspondences, communications, is now getting replaced by digital and electronic versions.
Further, there has been a reduction in the use of physical cash transactions in recent years, this trend was boosted further by the ongoing Covid19 pandemic. These developments have resulted in many governments and central banks stepping up their efforts towards exploring a digital version of the currency.
It is also seen as the banks’ interest in pursuing specific policy objectives. For example, facilitating negative interest rate monetary policy. Another objective is to provide the public with virtual currencies, that carry the benefits of private virtual currencies while avoiding the damaging social and economic consequences of private currencies.
A CBDC is a legal tender issued by a central bank in a digital form. It is the same as a physical currency and is exchangeable with the physical currency. Only the form is different.
It is also important to understand what is not a CBDC. CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies (like crypto) that have grown over the last decade. Private virtual currencies are not in line with the historical concept of money. They have no intrinsic value.
Check out: Guide on Cryptocurrency Taxation
What is the need for CBDC in India?
- To replace the cash uses for small value transactions.
- To reduce the cost of printing, transporting, storing, and distributing currency.
- To provide a safe and convenient alternative to physical cash.
- To enable ease of transaction and faster settlement.
- To protect the general public in an environment of volatile private virtual currencies.
Features of CBDC in India
- A legal tender in digital form
- Based on blockchain technology
- Exchangeable at par with cash
- Convenience of deposits and the safety of currency
- Reduce settlement risk in the financial system
- Real-time payment without the need of an intermediary
- Risk-free alternative to bank deposits
- Ensuring high standards of cybersecurity
To sum up, CBDC is the same as currency issued by a central bank but takes a different form than paper. It is the sovereign currency in an electronic form and it would appear as a liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form, and use of a CBDC can be molded for specific requirements. CBDCs will be exchangeable at par with cash.