RBI has commenced India’s first Digital Rupee pilot project has commenced in the wholesale segment. The use case for this pilot is settlement of secondary market transactions in government securities and nine banks have been identified for participation in this pilot project. According to the Central Bank, use of digital ruppe in wholesale segment is expected to make the inter-bank market more efficient and reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. RBI also plans to launch the first pilot in Digital Rupee-Retail segment within a month in select locations in closed user groups comprising customers and merchants.
CBDC or National Digital currency:
A Central Bank Digital Currency (CBDC), or national digital currency, is simply the digital form of a country’s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the government.
SC Garg Committee recommendations (2019):
- Ban anybody who mines, hold, transact or deal with cryptocurrencies in any form.
- It recommend a jail term of one to 10 years for exchange or trading in digital currency.
- It proposed a monetary penalty of up to three times the loss caused to the exchequer or gains made by the cryptocurrency user whichever is higher.
- However, the panel said that the government should keep an open mind on the potential issuance of cryptocurrencies by the Reserve Bank of India.
Need for a CBDC:
- The growth of cryptocurrencies such as Bitcoin, Ethereum etc has raised challenges to fiat currencies.
- Along with their other vulnerabilities made the central bank of each country explore the possibility of introducing their own digital currencies.
- A 2021 BIS survey of central banks, which found that 86% were actively researching the potential for such currencies, 60% were experimenting with the technology, and 14% were deploying pilot projects.
- The need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another.
Viability of a CBDC:
- An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
- India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC — to the extent large cash usage can be replaced by CBDC, the cost of printing, transporting and storing paper currency can be substantially reduced.
- As the currency in digital form, it can provide an efficient way for financial transaction. Further, digital currency also solves the challenges with Cash and coins. Cash and coins require expenses in storage and have inherent security risks like the recent heist in the RBI currency chest.
- There are about 3,000 privately issued cryptocurrencies in the world. According to IMF, the key reason for considering national digital currency is to counter the growth of private forms of digital money.
- There is a possibility of these companies going bankrupt without any protection. This will create a loss for both investor and creditor. But the National Digital currency has government backing in case of any financial crisis.
- As the state-backed digital currency can provide investor/consumer protection, the private can confidently invest in the associated infrastructure without any doubts over its regulation. This will improve the services to people.
- The national digital currency will be regulated by the RBI. So, there will be less volatility compared to other digital currencies.
- Current RBI’s work on inflation targeting can be extended to national digital currency also. Since India is planning to ban other cryptocurrencies, the RBI can better regulate digital and fiat currency. Thus upgrading to digital currency and balancing the macroeconomic stability.
- With the introduction of CBDC in a nation, its central bank would be able to keep a track of the exact location of every unit of the currency, thereby curbing money laundering.
- Criminal activities can be easily spotted and ended such as terror funding, money laundering, and so forth
- India is already facing many cyber security threats. With the advent of digital currency, cyberattacks might increase and threaten digital theft like Mt Gox bankruptcy case.
- According to the Digital Empowerment Foundation in 2018 report, around 90% of India’s population is digitally illiterate. So, without creating enough literary awareness introduction of digital currency will create a host of new challenges to the Indian economy.
- Introduction of digital currency also creates various associated challenges in regulation, tracking investment and purchase, taxing individuals, etc.
- The digital currency must collect certain basic information of an individual so that the person can prove that he’s the holder of that digital currency. This basic information can be sensitive ones such as the person’s identity, fingerprints etc.
There are crucial decisions to be made about the design of the currency with regards to how it will be issued, the degree of anonymity it will have, the kind of technology that is to be used, and so on. There is no doubt that the introduction of National Digital currency prevents the various threats associated with the private-owned cryptocurrencies and take India the next step as a digital economy. But the government has to create necessary safeguards before rolling out. India needs to move forward on introducing an official digital currency.