Central Bank Digital Currency
Context:
- Recently, the Reserve Bank of India announced that the first Digital Rupee pilot project for India had begun (RBI).
Details:
- The settlement of secondary market transactions in government securities is one of the use cases for the pilot project, and permission to participate has been granted to around nine institutions.
- Because it believes that using the Digital Rupee in the wholesale market will increase interbank market efficiency and decrease transaction costs by doing away with the need for settlement guarantee infrastructure or collateral to reduce settlement risk, the RBI has started the first Digital Rupee pilot project in the country.
- Additionally, RBI is getting ready to introduce the first pilot in the closed user groups for customers and merchants in the Digital Rupee-Retail segment in a few particular places.
Digital rupee or Central Bank Digital Currency (CBDC):
- The RBI, the national bank of India, has made available a digital form of currency notes known as CBDC.
- CBDC has been digitally issued by a central bank, according to RBI, and is therefore legitimate tender.
- The CBDC, also known as the “Digital Rupee” or “e” in India, will replace the country’s present payment systems.
- Despite being in digital form and having some advantages, such as being simpler, quicker, and less expensive, CBDC are remarkably similar to banknotes.
- The Digital Rupee, or CBDC, is expected to offer all the benefits of cryptocurrencies while also resolving the majority of its problems, according to experts.
A prerequisite for CBDCs:
- The way that money is used around the world is changing quickly due to global technological breakthroughs. Central banks throughout the world are beginning to recognise the potential viability of digital currencies as a result.
- Due to the digitization of money brought about by the adoption of cutting-edge technologies like blockchain, the creation of Central Bank Digital Currencies is crucial in order to take advantage of any potential advantages that these innovative technologies may offer.
- Additionally, in reaction to the enormous expansion of private cryptocurrencies in recent years, central banks all over the world are developing their own varieties of sovereign digital currencies to counter the challenges posed by such currencies. The fundamental essence of money has been questioned as a result of this.
Different CBDC types:
- The CBDC, also known as the Digital Rupee, is divided into two categories: Retail (CBDC-R) and Wholesale (CBDC-W).
- Retail: The retail industry receives the majority of these electronic payments (CBDC-R).
- All users may be able to purchase CBDC-R.
- The central bank has a direct obligation to CBDC-R participants to ensure that they have access to safe money for payment and settlement.
- Wholesale (CBDC-W): It is designed to settle transactions involving wholesale interbank transfers.
- Banks are allowed to use CBDC-W for financial transactions on the capital market, interbank market, and government securities (G-Sec) segment.
- Through CBDC-W, the security and efficiency of the systems used to settle financial transactions can be improved.
The technologies used:
- Due to CBDCs’ digital nature, technological considerations have continued to be important.
- Blockchain technology, a distributed ledger-based technology in a centralised form, powers the CBDC primarily.
- The centralised form’s guiding premise is to provide strong governance standards, stability, and technical security.
The importance of the pilot project started by RBI:
- An important turning point in the history of money is anticipated with the introduction of the Digital Rupee, which is expected to revolutionise how transactions and business are done.
- Before the Digital Rupee is implemented in the retail segment or altogether, the wholesale segment pilot project will be essential as a confidence-boosting instrument to demonstrate to all stakeholders that it is operating exactly as intended.
- Additionally, the pilot project will assist RBI in finishing all CBDC-related duties prior to launch.
Recommendations:
- The RBI must examine international best practises, including the Swedish e-krona, and research done to reduce the cost of various forms of infrastructure.
- The RBI must also make sure that the Digital Rupee fulfils the same function as paper money, which enables transfers from wallet to wallet without a bank account.
- The public’s ongoing suspicion of digital currencies, which includes concerns about cybercrime, cyberfraud, and money laundering, must also be addressed by RBI.
- Due to the fact that CBDCs are currently only in their conceptual, infant, or pilot stages globally, there is also a lack of precedent. To create a platform that satisfies the needs, iterative technological design and extensive stakeholder input are required.
Conclusion:
- The RBI’s CBDC, also known as the Digital Rupee, offers a variety of promises, including upholding transparency and having minimal operating costs. To ensure the introduction and implementation of CBDC, however, careful planning and monitoring with regard to the scope, cost, and deadlines are essential.
