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The Eminent Tale of Indian CBDCs

Key Takeaways
  • CBDC stands for digitized or virtual cash that can be used everywhere nationwide
  • Many popular banks have joined hands in this project
  • It's necessary to make the economic system more effective and paper-free
  • Nobody needs a bank account to transfer this form of money
02-Mar-2023 Sudeep Saxena
The Eminent Tale of Indian CBDCs

The Reserve Bank of India wants to use digital currency all over the country by the end of the year. However, multiple sources say the pilot program has already shown some problems. 

India held two CBDC trials in 2022

On November 1, nine financial institutions joined a CBDC wholesale initiative for the first time (CBDC-W). The second is a pilot program for CBDC stores (CBDC-R) that started on December 1 in Mumbai, New Delhi, Bangalore, and Bhubaneswar. The first four banks to join were the State Bank of India, the ICICI Bank, the Yes Bank, and the IDFC First Bank.

It is now in 15 places, with Chandigarh being the most recent. Reliance Retail is the biggest store in the country, one of the more than 50,000 customers and 10,000 small and large merchants who have signed up for the service.

What is CBDC?

In the words of RBI, "To put it simply, a CBDC is a digital currency issued by a central bank. It functions identically to fiat cash and may be traded for fiat currency one-for-one. It's the same thing below, but in a new guise ". To rephrase, "digital money" refers to a local currency that has been digitized or virtualized and is equivalent to real cash.

CBDC is a digital currency distinct from private crypto because it is supported and given by a government-backed bank. CBDC is equivalent to fiat currency issued by a bank but is not physically minted (or polymer). In the Reserve Bank of India books, it would be recorded as a liability because it is an electronic representation of a sovereign currency.

So, digital money made by the government is:

  • a currency that the government and central bank recognize.

  • legal tender

  • contains digital content.

  • equivalent to a currency based on faith rather than merit.

  • use blockchain technology as its foundation. 

CBDC is a digital currency that has gained widespread use over the past decade, although not on par with virtual currency or crypto. You must know how CBDC differs from other digital currencies to grasp it well. The term "cryptocurrency" refers to a type of digital currency. It's important to note that not all digital currencies may be classified as cryptocurrencies.  

Cryptocurrencies are secure despite the lack of encryption on digital currency since they employ blockchain technology. Because no one may issue their virtual currency, their obligations and liabilities are hidden.

Why has CBDC suddenly become more well-known in India?

From at least 2013, the RBI has been considering the introduction of a CBDC. It needs to be apparent what the RBI would gain by giving a CBDC. Others maintain that this would lead to domestic monetary monitoring and security. Most countries are still working on CBDCs, while several have already begun using them. Eleven nations have established their digital currencies as of August 2022. Several countries, including China, are still researching and enhancing their CBDCs. A wide range of factors is propelling CBDC in India.

On the other hand, the necessity for CBDC originates from pursuing a more equitable and effective monetary system. Like that used in India's economic system, paper currency may be easily counterfeited or damaged over time. As a result, producing and distributing it is a costly undertaking. 

Moreover, paper cash needs to be stronger regarding storage and transportation. This would guarantee that India can stay caught up to other nations when adopting cutting-edge financial innovations, keeping it at the forefront of global financial system innovation. 

More people could participate in society if they had easier access to banking and other financial services, thanks to CBDC. Over 1.2 billion Indians do not now have access to formal financial services. Because of this, people cannot save money and secure their financial future. A CBDC might solve this problem by giving customers an alternative to traditional banking that is secure and easy to use. 

Last but not least, CBDC has the potential to lessen the financial burden of producing and distributing paper money. As CBDC would be digital, it would be safer and cheaper to make, reducing these losses. As CBDCs eliminate the need for banks to handle transactions, the hefty costs that banks charge for services like international money transfers may be eliminated.  

Payment systems could be made more efficient, streamlined, and global through the use of CBDCs. If an Indian buyer wanted to pay a foreign seller in digital dollars, the two parties could do so directly, cutting away any middlemen and completing the transaction immediately.

Why is a CBDC necessary?

CBDCs intrigue many, but thus far, only a few countries have moved past the prototype stage in building their own CBDCs. "A 2021 BIS study of central banks indicated that 86% were actively exploring the possibilities for CBDCs, 60% were experimenting with the technology, and 14% were conducting pilot projects," reads a quote from the RBI website. For what reason has there been a sudden flurry of curiosity? The following justifications have been made for CBDC's implementation: -. 

● Central banks, seeing a decline in paper money use, are looking to promote a more widely accepted electronic form of currency; 

● Jurisdictions that use a lot of physical cash are trying to streamline the process of issuing currency.

● As private virtual currency use rises, central banks work to provide for this need while avoiding the worst effects of the alternative.

CBDC and Its Significance in India

Reducing reliance on cash, total currency management costs, and settlement risk are potential benefits of introducing CBDC cryptocurrency in India. Entrepreneurs would have a place to launch new ventures, while the public and companies would have access to a secure and liquid electronic version of central bank money. A more secure, trustworthy, regulated, and legally binding payment method would be established by introducing CBDC in India. 

Here are some of CBDC's features:

● By monetary policy, a central bank issues a sovereign currency.

● The easily transferable legal currency that doesn't require a bank account to be held.

● To reduce the price of creating a new currency and doing business

● Appears as a liability on the books of the central bank

● The currency that may be exchanged directly with cash or commercial bank accounts

● To be widely recognized as a means of exchange, legal tender, and reliable store of value throughout all segments of society

Take Aways

Thanks to technological advances, more services and ways of making things are becoming digital. We are on the verge of a new era in banking, and the digitization of money is the first step toward a more advanced way of handling money.  

Several central banks have started making their digital currencies. These are called "central bank digital currencies" (CBDCs). By the beginning of 2023, India wants to have its digital currency. This currency would work like the electronic wallets that private companies already offer. 

The CBDC will be the first digital currency supported by the government. The Reserve Bank of India (RBI) will make digital rupees, a digital currency issued by a central bank and backed by RBI reserves. 

The digital rupee will be similar to other virtual currencies in many ways but also have unique traits. It will also make it easier for more people to use banking services and make printing and circulating money cheaper. CBDC has the potential to be better for users than traditional payment systems in the following ways: liquidity, scalability, adoption, ease of transactions, privacy, and speed of settlement.

The government's help with CBDC infrastructure is important for its growth, improvement, and ease of use. This change will make it easier for more people to use digital currencies, just like UPI did.

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