In today's post, we're going to discuss what the Central Bank Digital Currency (CBDC) is, how it differs from fiat currency and cryptocurrency, and why some are describing this phenomenon as the "Fourth Industrial Revolution".
But first, let's explore what the Digital Rupee is
We all know that there are several cryptocurrencies around. Some people even use them to buy real estate, make payments or even send money to friends and family around the world. But what if there was a way to do all this with just one currency? You'd be able to spend your digital money on whatever you want, including dining out or buying a new car. That's exactly what the central bank is working on right now. developing a digital currency that can be used for things like everyday purchases.
On Tuesday, November 1, the Reserve Bank of India (RBI) introduced India's first digital rupee pilot project for the wholesale market. The Reserve Bank of India's central bank, the Digital Rupee (e), often referred to as Central Bank Digital Currency (CBDC), issues currency notes in digital form. Despite being nearly identical to using banknotes, utilising digital money is undoubtedly easier, faster, and less expensive. Furthermore, it offers all the advantages associated with transactions that other things have.
As compared to the rupee, which is physically substantial, digital money is essentially payment systems that entail digital transactions in electronic form. Beginning November, the Reserve Bank of India (RBI) will begin its pilot program for the digital rupee.
The RBI's proposed digital rupee would be created using a cutting-edge payment system that is affordable, accessible, practical, effective, secure, and intends to support the digital economy even more. It should be highlighted, nonetheless, that the idea behind starting a digital currency is simply to supplement, not to replace, the current forms of financial transaction.
While the current payment system is still in place, it will give users an extra payment option. Consequently, it is safe to say that the use of digital currency will have no impact on that of traditional currencies.
The digital rupee would be issued as virtual money for dealing in government securities. Like other cryptocurrencies, the money will exist only digitally, but the Reserve Bank of India will control the digital rupee and it won't be decentralised.
The government of India will accept the digital rupee as a fully legal tender. Two phases of the launch are being conducted. The digital rupee has been made available for wholesale, or bulk, transactions, for the first time during this test phase.
It is impossible to directly compare the CBDC (Central Bank Digital Currency) to cryptocurrencies because the digital rupee is neither a tangible item nor a virtual asset. Crypto coins are also not exactly money.
The paper banknotes that are printed by central banks like the RBI are comparable to this digital rupee, which can be converted into cash. The RBI will keep producing CBDCs, which have the same purpose as banknotes but are not decentralised assets like cryptocurrencies.
Cryptocurrency and digital money both use online transactional methods, however there are a few minor differences between the two. Cryptocurrencies are an alternative payment method with their own unique algorithm, whereas a country's fiat currency is known as its central bank digital currency (CBDC).
The crypto currencies, which are digital assets on a decentralised network, are sometimes referred to as a country's digital fiat. A cryptocurrency's worth is unrelated to central financial institutions and is determined by a transparent procedure, starting with asset transfer and ending with asset ownership. On the other hand digital currencies, which are completely regulated by the central bank and the government who set the value of currency.
The primary objective of the Reserve Bank of India's (RBI) pilot project on digital money is to advance India in the struggle for virtual currencies. This is also a result of cryptocurrencies' growing acceptance.
Since the digital rupee would increase efficiency and transparency due to the usage of blockchain technology, the debut will surely revolutionise the game. Real-time tracking and ledger maintenance will also be possible with blockchain.
Whether they are wholesale or retail, customers will always have access to the payment system. Indian clients' direct payments enable real-time account settlements and lower transaction expenses. Using a digital rupee will also speed up foreign trading and do away with the need to open a bank account.
Additionally, this will facilitate Indian clients' direct payments, lowering transaction costs and facilitating real-time account settlements. A digital rupee will speed up international transactions and do away with the need to open a bank account.
The wholesale CBDC has the ability to change transaction settlement mechanisms and increase user accessibility. This will increase financial inclusion and strengthen the nation's entire digital economy. The reserve bank will soon make the CBDC available to the retail sector as well.
Furthermore, even for users connected to a specific bank account, the adoption of the digital rupee will speed up cross-border transactions.
It is anticipated that the pilot program for Central Bank Digital Currency (CBDC) being launched by the Reserve Bank of India (RBI) on November 1, 2022, will increase the interbank market's efficiency and security.
According to the apex bank, the step will lower transaction costs by avoiding the requirement for infrastructure for settlement guarantee systems or for collateral to decrease settlement risk. Retail CBDC and wholesale CBDC are the two fundamental classifications for CBDC.
The RBI initially launched digital currency for the wholesale market. To settle interbank transfers and other related transactions, the central bank came up with wholesale CBDC.
The RBI has selected nine banks to participate in the wholesale pilot project for the digital rupee. Union Bank of India, State Bank of India, Bank of Baroda, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC are a few of them.
The launch procedure consists of two steps. During this testing period, the digital rupee has been used for the first time in wholesale transactions, or large transactions. In addition to the wholesale e-rupee pilot, the RBI will run a parallel retail experiment this month.
The first and foremost thing to understand about the digital rupee is that it will not be a cryptocurrency. Remember, cryptocurrencies are decentralised, which means that there is no central authority involved in the generation of the currency. The digital rupee, however, is a tool of the Reserve Bank of India, which implies that an underlying centralised authority will manage it.
Much like physical banknotes backed by reserves of gold and silver, the digital rupee is a currency that's fully backed by an underlying asset. There's just one difference: it's not physical at all—it's digital, and exists entirely within the domain of blockchain technology.
By Akhilesh Kumar Yadav