Indian digital currency to be launched in FY23 to be cost effective, transparent and secure

  • Nearly 100 countries are exploring CBDCs at one level or another. Some research, some tests and some already distributed CBDC to the public, says the IMF.
  • Finance Minister Nirmala Sitharaman said digital currency will give a big boost to the digital economy.
  • The idea of ​​issuing central bank digital currency was put into action after all the other countries piloted the digital currency after the great popularity of cryptocurrencies.
  • Experts say CBDCs, bitcoins and private rooms, etc. are not the same as the latter are unregulated assets.

The central bank digital currency (CBDC) is set to launch in FY23, Finance Minister Nirmala Sitharaman had announced in her budget speech on February 1. She had said that digital currency would give a big boost to the digital economy.

“The introduction of central bank digital currency (CBDC) will give a great boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. ‘introduce digital rupee, using blockchain and other technologies, which will be issued by the Reserve Bank of India from 2022-23,’ Sitharaman said in a budget document.

The idea of ​​issuing a central bank digital currency came to fruition after all the other countries piloted the digital currency after the great popularity of cryptocurrencies.

According to the International Monetary Fund (IMF), nearly 100 countries are exploring CBDCs at one level or another. Some research, some testing, and a few are already distributing CBDC to the public.

Rabi Sankar, Deputy Governor of RBI, said that while interest in CBDCs is now almost universal, very few countries have even reached the pilot stage of launching their CBDCs. About 86% of plants were actively researching the potential of CBDCs, 60% were experimenting with the technology, and 14% were deploying pilot projects.

What is central bank digital currency and is it similar to cryptocurrencies?
A central bank digital currency (CBDC) is a digital currency issued by a central bank, which will be used for transactions similar to other physical currencies.

“A CBDC is legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable on a one-to-one basis with fiat currency. Only its shape is different,” Sankar said in a report.

On an important note, cryptocurrencies are private money, while CBDCs are government-backed forms of money.

The main advantage of virtual currency is that with it it is possible to easily record and track transactions.

Although the concept of digital currency is inspired by private virtual currencies like cryptocurrency, it cannot be compared to those virtual currencies which have no underlying asset and are not legal tender as they are unregulated and decentralized.

“The CBDC is simply the physical rupee you have in your wallet today, it will be a digital representation of that physical note. And so most countries are exploring. The features and functions you have with a physical note today, the digital rupee will have the same features and functions,” said Aman Cheema, Head of Global Real-Time Payments and CBDCs at FIS in a conversation with Business Insider.

Cheema says there is a lot of confusion between CBDCs, bitcoin and private coins, etc., as he says CBDC is not bitcoin, which falls under unregulated assets.

CBDC will be more profitable than other payment alternatives
RBI Deputy Governor T. Rabi Sankar recently said that the CBDC could become a tool to reduce the time and cost of cross-border transactions.

“Imagine a UPI system where CBDC is processed instead of bank balances, as if money were remitted – the need for interbank settlement disappears. CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems” , Sankar said last year.

Also, another profitable perk could be replacing it with cash. India’s high currency-to-GDP ratio is another advantage of CBDCs. To the extent that the heavy use of cash can be replaced by CBDCs, the cost of printing, transporting, storing and distributing cash can be reduced.

How will blockchain technology help launch the CBDC?
Blockchain is a type of ledger technology that stores and records data. Technologies like blockchain are being considered by several countries exploring the CBDC that will facilitate the processing and settlement of financial transactions between end users of digital currency. Blockchain technology would allow RBI to track transactions and protect the privacy of CBDC users.

Blockchain technology allows many different entities to keep a copy of transaction history. Accordingly, RBI and other central banks are exploring CBDC using this technology as transactions will be secure, safe, transparent with historical records.

With this, blockchain removes the need for intermediaries like banks to help with every transaction and reduce costs. Meanwhile, blockchain technology is already being used by hospitals to track medical record data and agricultural businesses to track food supply chains.

“FIS is launching a CBDC Virtual Lab, which is a digital currency platform that will allow central banks and commercial banks to begin experimenting with what a CBDC could be in this market. I see this as an R&D capability, which will allow central banks to say if I should design my CBDC and what it would look like and how it would work,” Cheema said.

How does this benefit the economy?
CBDCs will benefit the economy as retail consumers can make easy, secure and fast payments.

The IMF, in a report titled “The Future of Money: Preparing for Central Bank Digital Currency,” said that if CBDCs are designed carefully, they can potentially offer more resilience, more security, greater availability and lower costs than private forms of digital currency. against volatile crypto assets.

Reports indicate that CBDCs could also be programmed to pay taxes or make other payments to the government as part of routine transactions.

“There are a number of triggers and factors as to why a nation wishes to launch a CBDC, which can range from declining silver usage. But they still need an element of cash circulating in the economy, so digitizing cash is one way to solve this problem. Another trigger is to bring the nation into a larger digital economy and move money into digital format to achieve that,” Cheema said.

Countries using CBDC
Most countries are currently exploring the idea of ​​a central bank-held digital currency for their nation.

According to an IMF report, in the Bahamas, the Sand Dollar, the local CBDC, has been in circulation for over a year.

Sweden’s Riksbank has developed a proof of concept and is exploring the technological and policy implications of CBDC.

In China, the digital renminbi [called e-CNY,] continues to grow with more than one hundred million individual users and billions of yuan in transactions.

And, just last month, the Federal Reserve released a report that noted that “a CBDC could fundamentally change the structure of the US financial system.”

Here are some key issues considered by RBI before launching the CBDC according to the report by RBI Deputy Governor, Rabi Sankar:

  • The scope of CBDCs – whether they should be used in retail payments or also in wholesale payments
  • The underlying technology – whether it should be a distributed ledger or a centralized ledger, for example, and whether the choice of technology should vary based on use cases
  • The validation mechanism – whether token-based or account-based
  • Distribution architecture – whether direct issuance by the RBI or through banks
  • Degree of anonymity, etc. However, conducting pilot projects in the wholesale and retail segments could be a possibility in the near future.

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