The Reserve Bank of India (RBI) is presently looking at modifications to the Reserve Bank of India Act, 1934. This comes in line with its plans to launch a Central Bank Digital Currency (CBDC). The definition of ‘bank note’ will also be broadened to incorporate digital currency. This move aligns with the government’s pending bill on cryptocurrencies that aims to ban all privately-owned cryptocurrencies in India, barring a few exceptions.
About the Central Bank Digital Currency (CBDC)
CBDC is a digital version of Fiat Currency, which is regulated by the central bank and can be transacted using wallets backed by blockchain. It is a legal tender issued in a digital format by the central bank. Fiat money is a type of currency issued by the government that isn’t supported by a commodity such as gold, giving central banks more control over the economy as they can regulate the amount of money being printed. Even though the concept of CBDCs was derived directly from bitcoin, it differs from decentralised virtual currencies and crypto assets because these are not backed by the state and lack the ‘legal tender’ status.
The Need for a Sovereign Digital Currency
The necessity for a sovereign digital currency stems from the disorderly nature of existing cryptocurrencies. Their creation and maintenance are publicly managed, leading to a potential need to regulate digital currency to curb malpractices. Furthermore, the value of cryptocurrencies, which are not pegged to any asset or currency, is solely determined by speculation (demand and supply), resulting in considerable volatility in their value.
India in the Face of a Digital Currency Proxy War
As the US and China compete to dominate other markets with new-age financial products, India faces the risk of getting entangled in a digital currency proxy war. Today, the creation of a sovereign Digital Rupee is not just an initiative towards financial innovation, but also a necessity to resist the impending proxy war that threatens our national and financial security.
Reducing Dependency on the Dollar
The Digital Rupee offers India an opportunity to establish its superior currency for trade with strategic partners, thereby diminishing dependency on the dollar.
The Arrival of Private Currency
When private currencies gain recognition, national currencies with restricted convertibility may face possible vulnerabilities.
The Significance of Digital Rupee
Digital Rupee holds several advantages such as lowered cost of currency management, real-time transactions without any inter-bank settlements, and minimized impact on the public from the use of private virtual currencies. Moreover, it presents a robust, efficient, regulated, and legal tender-based payments option.
Imminent Challenges
Nonetheless, the adoption of a digital rupee does come with its own set of challenges. One immediate concern would be money flight from a bank under stress. Furthermore, there are legal changes to be made considering the current provisions that have been made under the Reserve Bank of India Act which were created with a physical form of currency in mind.
Recent Developments
El Salvador recently became the first country to recognize Bitcoin as legal tender. Meanwhile, Britain is examining the possibility of launching a Central Bank Digital Currency (Britcoin).
Way Forward
The creation of a Digital Rupee will allow India to empower its citizens, enabling them to utilize this new form of currency in our rapidly growing digital economy. Therefore, it’s crucial for policymakers to carefully contemplate the prospects of a Digital Rupee in India, and its effects on the macroeconomy, banking system and money market.
