What is Digital Rupee?
Central bank digital currency or digital rupee can be defined as legal tender issued by the Reserve Bank of India, as per the concept note. The digital rupee is similar to a sovereign currency and equivalent to a one-to-one exchangeable currency, the RBI noted.
How is Digital Rupee different from money in digital form?
Explaining the difference between money in digital form and CBDC, RBI said, “A CBDC would be different from existing digital money available to the public as the CBDC would be a liability of the Reserve Bank and not of a commercial bank.”
Features of Digital Rupee
1) CBDC is a sovereign currency issued by central banks in line with their monetary policy.
2) It appears as a liability on the balance sheet of the central bank.
3) Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises and the government
agencies
4) Freely convertible against commercial bank money and cash
5) Convertible legal tender for which holders should not have a bank account
6) The cost of issuing money and transactions is expected to be low
Why is RBI introducing CBDC?
RBI believes that the Digital Rupee system will “strengthen India’s digital economy, enhance financial inclusion, and make monetary and payment systems more efficient.”
Pointing out India’s motivations for considering issuance of CBDC, RBI cited these reasons
a) reduction in costs associated with physical cash management
b) To advance the cause of digitization to achieve a less cash economy.
c) Supporting competition, efficiency and innovation in payments
d) To explore the use of CBDCs to improve cross-border transactions
e) Supporting Financial Inclusion
f) To protect the confidence of the common man in the national currency vis–vis the proliferation of crypto assets
Digital Rupee Vs Cryptocurrency
The RBI also expressed concerns about the popularity of the cryptocurrency in recent years. “The proliferation of crypto assets can pose significant risks related to money laundering and terrorism financing. In addition, the unbridled use of crypto assets can be a threat to monetary policy purposes as it can lead to the creation of a parallel economy and will likely undermine monetary policy transmission and the stability of the domestic currency. It will also adversely affect the enforcement of foreign exchange regulations, in particular, the containment of capital flow measures,” it said.
“Furthermore, a developing CBDC can provide the public with a risk-free virtual currency that will provide them with legitimate benefits without the risk of transacting in private virtual currencies. Therefore, it can meet the demand for a secure digital currency in addition to protecting the public. “The unusual level of volatility that some of these virtual digital assets experience. Thus, protecting the common man’s confidence in the Indian rupee along with the proliferation of crypto assets is another important motivation for introducing CBDCs.” The regulator further noted.