e-Rupees work similarly to paper currency and are exchangeable at a 1:1 ratio with existing fiats. It is a solution that balances innovation
with sensible regulation.
Dr Ravi Chamria, Co-founder & CEO, Zeeve
The Reserve bank of India recently released a 50-page concept note sharing its vision and roadmap for India’s central bank digital currency AKA e-Rupee. It’s a new form of currency that combines the three major functions of traditional money—medium of exchange, unit of account, and store of value—with the advantages of speed and cost-effectiveness.
CBDCs also offer the same transactional benefits as virtual currencies. But wait, they are not similar to cryptocurrency.
CBDC is not crypto:
CBDC, or Central Bank Digital Currency, is the digital form of offline fiat, issued and regulated by a country’s central bank. They differ from cryptos in that they don’t run on a public blockchain and have their value pegged to a government-regulated monetary system, unlike cryptos.
CBDC is also not the e-money we currently use for credit card transactions or online banking transfers. They are different because they would exist alongside physical cash and coins as legal tender, rather than simply being a digitized version of existing forms of money.
While central banks are still hesitant to fully embrace cryptocurrencies due to their concerns around macroeconomic stability and misuse, many are now exploring the benefits and possibilities of integrating state-owned digital currencies into their economies.
In fact, according to the think tank Atlantic Council, around 105 countries representing over 95% of global GDP are now exploring a CBDC.
The State Of Central bank Digital currencies
The introduction of CBDCs could have far-reaching implications for the world economy including faster and cheaper transactions, improved financial inclusion, greater efficiency in global trade, and more flexible monetary policy implementation by central banks. CBDCs offer a solution that balances innovation with sensible regulation.
RBI’s digital currency in India: the e-Rupee
The RBI concept note broadly defined e-Rupees(e₹) as the fungible legal tender issued by the central bank in a digital form. It will work similarly to paper currency and is exchangeable at a 1:1 ratio with existing fiats. The Indian CBDC will primarily be of two types. The first is a general or retail CBDC, which would be available for anyone to use like cash. The second one is a wholesale CBDC, which would only be accessible to select financial institutions for settling interbank transfers.
They are non-interest bearing, just like cash in your pocket. Another interesting feature of CBDC will be its programmable features. They can have an expiry date and specific end-use linked with them at the time of issuance. Hence, if credit has been given for agricultural activities, it can only be redeemed at selected outlets and if not spent, will automatically expire after a certain date.
CBDCs will also have a recall and recover feature, meaning tokens can be recovered and transactions can be reversed in case of hacks.
The possibility is that the government will not use Distributed Ledger Technologies (DLTs) for CBDCs at least for now considering its consensus needs and low throughput and will opt for a conventional centrally controlled database. Or hybrid approach can be taken with some components on decentralized networks.
There will be phased implementation for e-Rupees and the first phase will involve the launch of a prototype and tests in a controlled environment, followed by a pilot launch.
What does it entail for India?
While discussing the evolution of payment systems, RBI mentioned:
“Currently we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions” While there are still questions and concerns regarding CBDC adoption, they could potentially bring a range of benefits to the Indian economy:
Support Financial Inclusion:
As per RBI data, the composite financial inclusion index (FI-Index) for India is 56.4 for March 2022. This implies we still have a long way to go before we reach a state where a major portion of our population will have access to financial services. CBDCs could provide easier access to those previously left out.
In countries like India, where only 825M out of 1.4B population have internet access, CBDCs with offline functionalities could provide much-needed inclusion for the unbanked and underbanked. It could also address issues of poor internet connection, allowing individuals from rural or remote areas to easily participate in the digital economy.
Improving Cross-border Payments:
As per the world bank data, India is the world’s largest recipient of remittances with $87B received in 2021 alone. Hence the cost of sending remittances to India has some critical relevance. CBDCs could fix the current friction in cross-border and cross-currency payments by making the payment system more swift, secure, and inclusive.
Enhancing cross-border payments has been a goal of G20 economies for some time. The G20 economies have also made enhancing cross-border payments a priority. If done rightly, CBDCs can make cross-border transactions instant bridging the gaps between time zones, exchange rate differences, and legal or regulatory concerns across jurisdictions.
State-of-the-art payment systems:
India’s current payment and settlement networks include RTGS, NEFT, IMPS, and UPI. The addition of CBDCs could further enhance capabilities to meet the evolving speed and efficiency needs of our rapidly evolving digital economy.
A key feature of CBDCs is that they are a liability of the Reserve bank of India and not the commercial banks. In our present fractional reserve system, a commercial bank– even if solvent, always has credit and liquidity risk. But that will not be the case for CBDCs as the central bank can always meet its obligations using its own nonredeemable money.
Reduce costs of cash management:
Despite rapid digitization, India has increasing currency management costs. As per the RBI annual report for 2021-22, the percentage increase in the value of banknotes was 16.8% and 9.9% for the last two financial years, while the increase in the volume of banknotes for the same period was 7.2% and 5% respectively.
At the same time, our digital Payment Index (RBI- DPI) has also increased significantly from 100 in March 2018 to 349.30 in March 2022, signifying an increased appetite for digital payments. Central bank digital currencies can play a significant role here.
Getting CBDC right for India: Lessons from the rest of the world
From China’s controversial rollout of the Digital Yuan to Sweden’s slow but steady progress toward a cashless society, the rest of the world is offering valuable lessons for India as we venture into CBDC territory. In order to fully grasp the potential impact CBDC could have on our economy and financial system, we must closely examine not only our own trials and experiments but also those taking place in countries such as Japan, Australia, and Switzerland.
By keeping a watchful eye on CBDC developments worldwide, we can ensure that India approaches this new technology with both caution and enthusiasm.
Zeeve is a no-code Blockchain Infrastructure Automation Platform that enables easy deployment, monitoring, and scaling of DApps and other Web3 services.
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