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India to launch its own digital cryptocurrency till next year

The movement towards the digital economy is gathering speed and governments across the world are aiding this movement by framing digital friendly policies. In India, investors are rushing to buy cryptocurrencies and other digital assets.

In a welcome development, in her budget speech, the finance minister of India Ms. Nirmala Sitaram has announced that RBI is going to launch its own blockchain based digital currency i.e., Central Bank Digital Currency (CBDC).

A central bank digital currency is the digital counterpart of the paper currency, it is the legal tender issued by the central bank in the digital form. Value and availability wise, it is the same as fiat currency, only the form is digital. It is completely fungible and is exchangeable one-to-one with another unit of fiat currency.

The central government intends to amend the RBI Act, 1934 to grant the banknote status to the newly launched CBDC. The digital currency will be legal tender issued by the central bank in digital form. The currency will be launched using blockchain, a digital ledger that records the transactions that cannot be tracked.

Global Scenario[1] 

As per a survey conducted in 2021 by Bank of International settlements (BIS), 86% of the central banks in the world are researching the potential for CBDCs,60% were experimenting with the technology and 14% were deploying pilot projects in the field.

The Bahamas was the first to launch the CBDC-Sand dollar in October 2020. Nigeria has also come out with its own digital currency, eNaira. Recently, the US Federal Reserve has put out a discussion paper on the subject. The interest shown by the governments and regulators across the world point to a growing interest in digital assets and the need to provide a digital alternative to paper fiat money.

Indian Central Bank Digital Currency[2] 

According to sources, a lot of work has been done by the Reserve Bank of India in this regard, and it is working on both a wholesale based CBDC (to be used by institutions like banks) and digital Rupee for use by retail customers. Out of these two, the latter, being more complicated, may take more time to be launched. The central bank has also indicated that initially it will adopt a basic model.

As per RBI, while countries have issued CBDC for specific purposes in wholesale and retail segments, RBI is studying these models and their impact and only after that it will launch CBDC for general purposes.

Currently, the issues that RBI is evaluating are Underlying Technology, and whether it should be directly issued by RBI or it should involve banks as intermediaries. Banks have expressed apprehensions regarding the launch of retail digital currency, as it may make the role of banks redundant in the distribution of currency.

Blockchain for Digital Currency[3] 

One of the defining features of blockchain is that it eliminates the need for intermediaries while at the same time anonymously recording the transactions. How the RBI uses this feature to its advantage and still keeps the banks relevant is something that we will have to wait and see.

The announcement comes at a time when the other digital payment interfaces like UPI are seeing a massive adoption and usage, especially after demonetization in 2016. Cash transactions, however, continue to occupy the predominant share of payment transactions in the country. The launch of digital currency may trigger a wave of preparation activities among retail payment providers and apps to be ready to offer payment mechanisms using the digital rupee. A similar phenomenon has been seen in China, where major payment providers and apps are offering payment options including digital yuan.

In the long run, this may reduce the dependence on the Unified Payment interface system that is getting overloaded due to the sheer number of transactions taking place on it on a daily basis.

CBDC vs Cryptocurrency[4] 

Although there are plans to launch the digital currency using blockchain, just like the other cryptocurrencies like Bitcoin or Ethereum, the two would be quite distinct:

  1. Access[5] : – To buy cryptocurrency, you have to open a wallet with a cryptocurrency exchange in India, this might not be the case with CBDC as payment apps and banks may provide facility to store and transact in it.
  2. Supply[6] : – While the supply of popular cryptocurrencies like Bitcoin is limited (21 million Bitcoins will be issued ever), the supply of CBDC will be decided by RBI based on the macroeconomic factors.
  3. Legal Tender[7] : The CBDC will be legal tender from the word go, I.e., it can be exchanged for goods or services while cryptocurrencies that are traded on cryptocurrency exchanges do not enjoy that status as of now.
  4.  Price Volatility[8] : Most of the cryptocurrencies see massive volatility in their prices, which will not be the case with CBDC, which except for being in digital form will have all the characteristics of a physical Rupee

The launch of digital currency augurs well for the cryptocurrency market and is another step in the movement towards the digital economy. To buy Cryptocurrency and to start trading, you may log in to www.zebpay.com.


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