Presenting the budget of 2022, Finance Minister Nirmala Sitharaman had said that the Reserve Bank (RBI) will launch a digital rupee in the next financial year. The Finance Minister said that the Digital Rupee will be the central bank digital currency, which will be launched in 2022-23.

Central Bank Digital Currency (CBDC) is a digital currency issued by RBI with a legal tender. According to RBI, it will be a currency issued by the central bank but will be different from paper or polymer.

How is it different from Physical Rupee?

Digital currency cannot be burnt or damaged. So once issued they will always be there whereas this is not the case with notes. Due to being economical, there has been a lot of interest in CBDCs around the world. However, so far only a few countries have been able to go ahead with the pilot project in this matter. CBDC is an electronic record or digital token of the official currency of any country.

Jaya Vaidhyanathan, CEO, BCT Digital said, "Unlike private cryptocurrencies which have no intrinsic value through assets backing them, the RBI’s CBDC will simply be a digital equivalent of the physical rupee, which means that the CBDC can be exchanged for a set value of rupees once it comes into circulation. This means that digital currency will be worth the same as physical money, just like a Rs 10 coin and Rs 10 note is of the same value currently."

"With cryptocurrencies like the bitcoin fluctuating these days, the risks of private cryptos are now well known. The government’s cautious approach towards the CBDC rollout (not yet rolled out despite announcements of a pilot launch as early as last year itself) probably reflects this apprehension. However, we cannot throw the baby out with the bathwater – the benefits of the blockchain technology are too big to be overlooked by any government", she added.

CBDC could (i) help easily control monetary policy, (ii) provide timely relief measures in unforeseen situations like the pandemic, (iii) track tax collections efficiently, (iv) help fast track financial inclusion through direct transfers to citizens’ mobile phones at low cost, and (v) help prevent financial crime because of the digital nature of the transactions and the presence of a public ledger.

"Currency has three characteristics – is serves as a store of value, as a unit of account and as a medium of transacting. CBDC beautifully fulfils these requirements if implemented well, as it brings together the legitimacy associated with a respected central bank along with the advantages of blockchain technology. CBDC directly connects the central bank with citizens, as the blockchain mitigates the need for multiple financial intermediaries for money flow in the economy. This means two things: lower transaction costs for end-users, as well as immunity of money held in the currency, to events like bank failures etc as the currency is directly controlled by the central bank. For citizens, CBDC can lead to cheaper, faster and safer (instant payments facilitated by blockchain) transactions", said Vaidhyanathan.

How will the transaction be done?

Digital Rupee will actually be a currency based on other technology including Blockchain. There are two types of digital currency - retail and wholesale. While wholesale currency is used by financial institutions, retail digital currency is used by common people and companies.

In fact blockchain technology is decentralised. This means that all types of information are on all computers in a network. However, the digital rupee will be different from this. The reason for this is that it will be regulated by RBI. It really won't be decentralised. One will be able to easily send it to each other from mobile and will be able to buy all kinds of goods and use services.

How safe is CBDC?

Security is a significant part of traditional e-payment frameworks. It is no less basic in the plan and execution of a CBDC, where the capacity to settle payments continuously and with quick conclusion implies that exchanges won't be quickly halted or switched. While prompt and last settlement has existed in interbank installment frameworks for a really long time, it is later for retail installments.

Security breaks from the frameworks that empower the utilisation of CBDC could promptly affect payment frameworks and buyers. An interruption of a CBDC plan might prompt follow-on impacts that might present more extensive dangers to monetary business sectors, economies, and currency-giving institutions.

Vaidhyanathan said, "Safety must be seen from two points of view. One, whether the currency itself is safe or not. We have seen some cryptocurrencies approach zero value in short period of time, and the common man may have this concern. However, with a CBDC, we can be assured that this will not happen because as we just mentioned, a CBDC will simply be a digital equivalent of currency as it stands today."

"A second aspect of safety is that of transactions done using the currency. Here, there is a lot of clarity to be provided by authorities on how the common man will be protected from frauds. We are already seeing increasing frauds in digital banking impacting senior citizens, people who are not tech savy, and those outside metro cities. Financial education is slowly picking up, bringing in awareness among the public. With a CBDC, fraudsters may get more avenues to cheat, and regulators must gear up to tackle this challenge. Not that it is unsurmountable – credit card frauds for example have come down dramatically after the introduction of OTPs for card transactions a few years back by the Central Bank", she added.

CBDCs is likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation. Drawing board considerations and stakeholder consultations are important. Technological challenges have their importance as well. As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is also awaited.