Mumbai: Reserve Bank of India (RBI) governor Shaktikanta Das recently made a strong argument in favour of a central bank digital currency (CBDC) for India, dropping hints about the launch of its digital currency as early as December this year. RBI’s digital currency will supposedly be known as a digital rupee.
“The Reserve Bank of India may launch its first digital currency trial programs by December,” the RBI Governor told CNBC in an interview. He said that the digital currency will not be a new product for just RBI, but also globally and the central bank is extremely careful about the new project.
What is Central bank digital currency or CBDC?
CBDCs are digital versions of fiat currencies of a particular country. A virtual currency, CBDC is issued by the authority of a nation that is in charge of managing the fiat currency there.
According to reports, currently, the RBI is studying various aspects of CBDC, analysing coin’s security, its impact on the financial sector, the monetary policy, and the impact on the currency that is in circulation.
The RBI “is also exploring the choice between having a centralized ledger for the digital currency or the so-called distributed ledger technology (DLT),” Das said in the interview.
How will CBDC be different from cryptocurrency?
Virtual private currencies like Bitcoin have gained wide acceptance in the last few years. Sankar said that if these private currencies gain recognition, national currencies with limited convertibility are likely to come under threat.
Virtual currencies like Bitcoin are digitally encrypted, decentralised and not linked to or regulated by any government. A CBDC, on the other hand, will be a digital version of the fiat currency – one backed by the government.
While cryptocurrency operates independently, a fiat currency is issued by a country’s central bank. The latter requires intermediaries to make transfers.
Moreover, the supply of fiat currency is regulated by the central banks, and can be increased of decreased depending on the usages, whereas the supply of cryptocurrency is limited.
Also, a currency marked as a legal tender can be kept in bank accounts; the cryptocurrencies need to be stored in digital wallets.
CBDCs, depending on the extent of its use, can cause a reduction in the transaction demand for bank deposits and reliance on cash.
Notably, Central banks across the world have drawn up plans to launch their digital currency to battle cryptocurrencies. China has said that its e-CNY has been tested in 70 million transactions.