Innovation and modernisation are the hallmarks of India’s current digital infrastructure. Earlier this year, India’s Finance Minister Nirmala Sitharaman in her budget speech had announced the upcoming introduction of the Central Bank Digital Currency (CBDC) by the RBI, which became a reality in December 2022. However, the common man remains unfamiliar with this term. India’s CBDC will be “exchangeable at par with the existing currency”, with the RBI emphasising the need for integration and interoperability with existing payment systems.
Despite the Unified Payments Interface (UPI) coming to represent a convenient form of payment for users in the recent years, the fact remains that it is yet another way to perform financial transactions from one’s existing bank accounts and is subject to limitations such as payment failures. India’s retail CBDC was launched to augment the existing payments system and reduce the dependency on cash, in addition to offering other benefits, like the reduced cost of currency management and settlement risk for the financial institutions involved in the transactions.
What exactly is CBDC and how is it different from cryptocurrency and UPI?
CBDC, also known as the digital rupee, e-rupee, e-RUPI or e₹ in India, is the legal tender issued by the central bank in a digital form. Currently, over 100 countries, representing over 95 per cent of global GDP, are exploring CBDC – a steep increase from 35 in 2020.
It is easy to confuse the CBDC with the Unified Payments Interface (UPI) or other cryptocurrencies. CBDC transactions do not involve a bank as an intermediary, unlike in the case of UPI. It enables the movement of money directly between two private entities, individuals, or businesses – quite similar to cash.
CBDC varies from cryptocurrency in several aspects as well. Unlike the latter, this digital currency is a legal tender regulated by the central bank. In India, it represents the same value as the physical currency of the country; it is simply in a digital format. On the other hand, cryptocurrency is facilitated by a completely decentralised network using blockchain technology, far away from government or regulatory control. Many types of cryptos are mined (often illegally), and while all transactions are authenticated and recorded in public ledgers, they are highly volatile as financial instruments, and widely considered a risky investment, as recent crashes have shown.
Why is the RBI betting on the CBDC’s success?
Even though digital transactions are on the rise, they have not yet resulted in a dramatic reduction in the demand for cash in India. The RBI claims that it spent Rs 4,984.8 crore in security printing in FY22, as against Rs 4,012.1 crore in FY21. RBI is rooting for the CBDC to remedy the concerns around the growing popularity of cryptocurrencies while supporting the drive to go cashless. It is also expected to help India’s financially underserved people gain easy access to banking services, thereby boosting financial inclusion, as well as provide a cheaper and faster payment system for the country.
The CBDC can also enable India’s efforts to combat cybercrimes by making it difficult for individuals to engage in illegal economic activities. Another use is how it could positively impact cross-border payments over the long term.
How does it work? Key things to know
• The e-rupee is not an investment instrument; rather, a transaction instrument to transfer and receive money.
• The e-rupee will be issued through the e-wallets of select banks.
• Users can conduct transactions using QR codes using the comfort of their phone – incurring no charges. No bank account is required, and the system is even capable of supporting offline transactions without smartphones.
• Transactions are not entered in their commercial bank accounts and records are maintained by the RBI alone.
Bottom line
CBDC is certainly a potential alternative to plug the gaps in the current banking system. It could even be a good solution for countries with unstable currencies or low levels of financial inclusion. In India, the RBI has been taking calibrated steps to launch the CBDC because of its various implications for the Indian economy and monetary policy. While the digital rupee will reduce costs related to handling and printing cash for the government, it would also further the cause of a cashless economy. In many ways, it could be effective in preventing crime, money laundering and financing terrorism – but only up to an extent.
CEO, BCT Digital
While the CBDC could fast-track digital transformation and facilitate the move towards a digital economy, it comes with challenges, particularly in the retail segment, where cash remains popular. It will also have to contest for popularity with UPI systems, although the duo will eventually evolve to supplement each other.
Nevertheless, the CBDC also has potential drawbacks. Making users adopt it would be a steep hill to climb. For example, there are perceptions that CBDCs could lead to increased government surveillance. There are also concerns about their stability and scalability. Yet another challenge is the lack of understanding among the public about what CBDC is and how it works.
Addressing these concerns and raising awareness would be critical steps to take in the efforts to push the CBDC to the mainstream.