As Indians prepare to adopt the next generation of legal tender, here’s an introduction to Central Bank Digital Currency.
Over the past few years, the sharp rise of cryptocurrencies has attracted investors from all over the world who want to diversify their portfolios and earn high returns. However, the impact of higher interest rates in the past year has impacted the cryptocurrency market, leading to a significant sell-off. One bitcoin was worth over $68,000 this time last year, but today, it is only around $17,000, a massive drop of over 300%.
Some people have seen incredible profits from investing in crypto currencies, but the field is still risky because of its volatility. Most of these cryptocurrencies run on a decentralised platform that lacks regulation and investor protection policies. Digital currencies issued by the global central banks are an initiative taken by governments to encourage a centralised system. Today, more than half of the world’s central banks are either developing or have implemented their own digital currencies. This year, India also took a step forward in the process of regulating cryptocurrency by joining the group of countries that have their own digital currencies, commonly referred to as the “Central Bank Digital Currency” (CBDC).
Thus, we reach the subject of CBDCs. CBDCs and cryptocurrencies share many similarities in their overall structure. Distributed ledger technologies (DLTs), like blockchain, will be used to manage India’s CBDC. However, they are fashioned in such a way that they fall under the purview of the Reserve Bank of India. That’s one key distinction from decentralised digital currencies.
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On October 7, 2022, the RBI released a ‘Concept Note’ on CBDC. The note talked about important things to think about, like the technology and design choices, how the digital rupee could be used, and how it would be distributed. The CBDCs are expected to reduce dependency on cash, leading to lower overall currency management costs and reduced settlement risk.
On November 15th, the central bank shortlisted banks for a pilot project of CBDC. HDFC Bank, ICICI Bank, State Bank of India (SBI), and IDFC First Bank were roped in for the project. The banks, along with the National Payments Corporation of India, will run the program. As of now, the RBI is deliberating on whether CBDC-R should be interoperable with the current digital payments system or a new framework should be built.
Once it is legally issued, CBDC will be regarded by all three parties—citizens, governmental entities, and businesses—as a form of payment and legal tender.
Digital money has been a thing for quite some time now. With the meteoric rise of UPI, the number of online transactions have only sky rocketed. However, digital money exists in banks accounts and is recorded as book entries on ledgers on commercial banks.
What sets CBDC apart from digital money is that it will be directly on the ledger of RBI.
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According to the RBI’s concept note, the CBDC can be defined as the legal tender issued by the Reserve Bank of India. It is being called as the “Digital Rupee”. The RBI has proposed to issue two versions of the rupee, or e-Rupee. The RBI’s CBDC is the same as a sovereign currency and is exchangeable one-to-one at par with the fiat currency, the regulator mentioned.
The central bank plans to issue two versions of CBDCs: general-purpose or retail (CBDC-R) and wholesale (CBDC-W). Retail CBDC can be used by all, including the private sector, non-financial consumers, and businesses. However, only selected financial institutions will have access to wholesale CBDC. Wholesale CBDC is designed for the settlement of interbank transfers and other wholesale transactions. On the other hand, retail CBDC will be an electronic version of cash that is mostly used for retail transactions.
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Any currency, whether physical or digital, should have sovereign control over its form and volume because its stability depends on macroeconomic fundamentals and the conduct of monetary policy. And staying in line with that idea, the Digital Rupee is poised to become mainstream. However, the implementation of CBDCs in real world scenarios will take some time. In the meantime, if you are looking to make the most of the present financial system, you may want to stick with conventional financial products. Most Credit Cards offer fantastic reward programs; some give you free fuel, while others make travel cheaper.
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