Digital Rupee is coming – Are you Ready?

By BWA Envoy
February 11, 2022
2 Minutes Read

Decrypting the Digital Rupee

Digital Rupee is coming – Are you Ready?

One of the important announcements of the Budget 2022 was the introduction of the Digital Rupee. This new concept has posed a lot of queries in the minds of some - How will it impact the common man? What are the challenges? How will it function? the list is endless. Relax, here is all you need to know about Central Bank Digital Currency (CBDC) 'Digital Rupee'.

What is CBDC 'Digital Rupee'? How does it work?

• CBDC will be an Indian Digital Currency.
• CBDC is a sweet rip-off of the cryptocurrency model – both rely strongly on blockchain encryption.

Will it be like digital payments such as Phone Pe, or Google Pay?

No, the Digital Rupee has a wider scope. It can transform our payment systems and solve some existing problems. It will eliminate the need for a bank account. Unlike the digital payments that are linked to your bank account, the Digital Rupee will be stored in an app on your phone. This will be a game-changer in India, where over 19 crore adults do not have a bank account.

So, is it just like Bitcoin or any other crypto? How will it differ?

CBDC is blockchain-based, just like normal crypto. Unlike normal crypto, it will not be volatile. The price of cryptocurrencies differs daily, but the price of one Digital Rupee will largely remain the same. This is because the Digital Rupee derives value from physical currency, which is pegged to the US dollar. Above all, the transactions will be tracked, and all payments will be recorded with the government which will increase its legitimacy. The Digital Rupee will be neither like digital payments nor like normal crypto.

What was the reason for the government to issue the Digital Rupee?

Current payment systems have increased the adoption of cryptocurrencies. It is a faster, more efficient, and more private method of payment. For many, it is an easy investment since it has an easy way of KYC, has a user-friendly interface, and has easy accessibility. However, it is very volatile. Since cryptocurrencies are largely untraceable, it can make it easier for fraudsters to use them as a source for money laundering. At the current stage of evolution, the issuance of crypto largely remains opaque. It is not money and not currency. The worldwide adoption of cryptocurrencies has become the biggest threat to the current currency system. If everyone starts using these private cryptocurrencies, the government-owned currencies would be impacted.

Fast forward – the introduction of CBDCs!

Furthermore, CBDCs will revolutionize cross-border payments and remittances. Currently, banks depend on intermediaries like VISA/Master cards, settlement institutions, and clearinghouses to transfer and redirect funds amongst each other. A standard foreign exchange transaction takes more than two days to settle. There are multiple friction points in the existing cross-border payments framework, such as limited operating hours, fragmented data formats, complex processing of compliance checks, and legacy technology platforms. But CBDC will be more affordable as transactions will take place easily and quickly through the blockchain without any intermediaries.

Has any other country issued digital currency?

Many countries are currently exploring CBDCs and nine of them have fully launched some version of a digital currency. Nigeria with its launch of e-Naira is the latest country to join the CBDC bandwagon. Japan is looking into its own CBDC, and in January 2022, the U.S. Federal Reserve released a study on the digital dollar but have yet to take a firm position on it. With the Budget 2022 announcement, it appears that India will soon join the league making it one of the world’s largest economies to adopt CBDC.

Will this make cryptos such as Bitcoins/Ethereum legal in India?

No. According to the Finance Ministry, crypto will not be a legal tender. Only the Digital Rupee of RBI will be a legal tender in India. Though the Union Budget 2022-23 has proposed a taxation scheme for virtual digital assets including cryptocurrencies and nonfungible tokens, the finance minister has clarified that taxing these assets does not automatically bring legitimacy.

What impact will it have on the current system?

Bringing all the money onto a blockchain will be a mammoth task. China has been working on a digital version of its Yuan since 2014 and is yet to launch its digital currency nationwide. Since CBDC would not require a bank account, it could impact the banking system largely. Additionally, CBDC would be a totally new technology and may require a change in the business models of companies, particularly FinTech. Proponents of the digital rupee claim that CBDCs will revolutionize the fintech sector by creating new opportunities. The picture remains unclear. While the proposal of introducing CBDCs is on the table, the road map is yet to be defined. A lot of decisions still need to be taken, both nationally and globally. This would also require several amendments to the existing acts like the RBI Act, FEMA, and the Information Technology Act to make it a reality.