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Essay On Digital Currency In India | Advantages & Disadvantages

Essay On Digital Currency In India | Advantages & Disadvantages

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Essay On Digital Currency In India

Introduction .

Digital Currency available in digital or electronic form and not in physical form. It is also known as electronic money, cyber-cash, electronic currency, or digital money . They are accessible with computers or cell phones. Digital currencies do not require an intermediary for a transaction. All digital currencies are not cryptocurrencies but all cryptocurrency is 100% digital currency .

What Are digital currencies?

Digital currencies are intangible. Transactions can be done only through computers, cell phones, or electronic wallets. Like any other fiat currency, it can also be used to purchase goods and pay for services.

Digital currency mainly worked for instantaneous transactions, When it linked to supported devices and networks, it can be seamlessly executed to make payments across borders.

As payments in digital currencies are made directly between the parties without the need for intermediaries the transactions are usually instantaneous and low cost. Transactions involving brings in necessary record-keeping and transparency in dealings.

David Chaum introduced the idea of digital cash through a research paper in 1983. In 1989, he founded Digicash an electronic cash company to commercialize the ideas in his research.

E-gold was introduced in 1996. In 1998 Paypal came into the picture. In 2009, bitcoin was launched which is a decentralized blockchain-based digital currency with no central server and no tangible assets held in reserve.

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Advantages Of Digital Currency

• Lower transaction costs and ability to make payments any time.
• Receiving funds more efficiently than by legacy financial institutions.
• It is easier for international customers to do business with you.
• Fraud protection, for e.g. In Cryptocurrency Trading, you don’t require to show your personal information.
• The cost of making currency becomes decreased due to digital currency
• Anyone can easily receive or send payment anywhere, anytime.

Disadvantages Of Digital Currency

• For Digital Currency strong technical mechanism required.
• lack of proper Internet connection across the country
• Lack of skilled users
• Lack of electronics, gadgets, such as mobile, laptop, etc. between poor’s person.
• Reduces the number of jobs in the banking sector.

Digital Currency in India

If a digital currency is regulated by a central bank. it is known as central bank digital currency( CBDC ).

Unlike crypto-currencies which are issued without a central bank backing and are issued and traded on exchanges, a CBDC is a digital currency that holds the same value as fiat currencies issued by a country’s central bank.

Conclusion  

At the end of the day, digital currencies have the potential to change the world of business as we know it.  In other words, the obstacles that digital currencies must overcome in order to become ‘mainstream’ are not just economic but mental, as well.

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Future of digital currency in India

114 countries including India are exploring digital currency, and as is known, India has also launched its own retail CBDC on pilot. The RBI foresees e-Rupee issued and regulated by the central bank as the next-generation seamless, ubiquitous and anonymous payment mode that delivers value to customers. Mihir Gandhi and Zubin Tafti examine the pros and cons.

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The need for changing payment modes

The Reserve Bank of India (RBI) has decided to withdraw INR 2,000 denomination banknotes from circulation. In a move reminiscent of demonetisation in 2016, people will now be required to exchange these notes by September 30 of this year.

This development may give the payment industry, which has witnessed a revolution through digital business models and innovative systems, a further boost. Banks are collaborating with third-party providers to boost innovation in the payment ecosystem. The government has provided platforms such as Unified Payments Interface (UPI) to encourage digital payment adoption. Consequently, the RBI has reported a two-fold increase in digital payments in India since 2018. In 2022, India registered a record of ₹149.5 trillion UPI and card transactions. 1   As per the India Digital Payments Annual Report, UPI clocked over 74.05 billion transactions in volume and ₹126 trillion in terms of value. 2

The popularity of channels by transaction volumes is shown below.

Payment system indicator – March 2021 vs March 2022

Payment modes and channels

Technology is evidently evolving in parallel with the end user, and use cases are increasing with the emergence of new avenues of payments. Payments form the core of any financial institution and it’s becoming imperative for central banks to provide avenues that offer new world functionalities for relevance. Central Bank Digital Currency (CBDC) is one such avenue that aims to help central banks facilitate financial services widely. The RBI foresees e-Rupee/Indian CBDC – that is, the digital form of the fiat currency issued and regulated by it – as the next-generation payment mode that is seamless, ubiquitous and anonymous, delivering customers value and a satisfying experience.

e-Rupee can act as a viable alternative to paper currency, the issuance and circulation of which entail a long process with the government incurring heavy costs. For example, for every INR 100 note, the cost estimate is around 15%–17% of the entire expense in a four-year lifecycle, including printing, distribution and returning due to soilage. 3   As cash circulation increases, it puts pressure on distribution and storage channels, along with the environment, owing to its carbon footprint. A larger amount of cash in circulation means pressure on regulators and governance in terms of printing, distribution and storage, thus posing several risks such as counterfeits, spoilage and security risks. Counterfeits are a huge risk with the RBI reporting an increase in fake 2,000 and 500 currency notes in fiscal year 2021–22. 4  A major risk with carrying cash is the risk of loss or theft. e-Rupee gives central banks better control over usage and distribution. This is one of the primary motivations for the RBI to launch CBDC.

Launching the e-Rupee in India would also mean taking a step towards a digital economy, given the rise in the adoption of mobile and internet-based payments, besides improving the cumbersome cross-border transaction process. One of the top priorities of the G20 has been to enhance cross-border payments and it has been implied that CBDC can be an appropriate tool. Cross-border transactions have always involved time-consuming processes laden with strict compliance checks owing to their dependency on the correspondent bank’s availability and time zones. Financial institutions which have reserves in the RBI can transact in CBDC and make it easier to reduce counterparty risks. CBDC is also expected to accelerate the process by automating the method of transaction and settlement. Some other potential areas where CBDC can be leveraged to ease the process of transactions include government securities and international forex trade.

The design of CBDC depends on the functions it is expected to perform, as the RBI has underlined in its concept note. 5   The implications of CBDC for payment systems, monetary policy, and the structure and stability of the financial system will be determined by the design. A primary consideration is that the design features of CBDC should be least disruptive. Accordingly, the key aspects include:

Types of CBDC or e-Rupee issued: Retail and wholesale 6

Models for issuance: direct, intermediary/indirect and hybrid 7, form of design: token based and account based 8.

Around 114 countries are exploring CBDCs, and as many as 60 are at an advanced stage. Countries that have already launched a retail CBDC (R-CBDC) are the Bahamas, Cambodia, East Caribbean Union, Nigeria, China and Jamaica. Central banks which are exploring an exclusive wholesale CBDC (W-CBDC) include Singapore, Australia, Saudi Arabia and the European Union.

The status of CBDCs across 114 countries as of December 2002. 9

The following are a few notable collaborative development projects for wholesale initiatives: 10

Participants

• Bank Negara Malaysia
• South African Reserve Bank
• Reserve Bank of Australia
• Monetary Authority of Singapore

Motivations

Assess the function of a multi-CBDC platform in terms of key challenges, benefits, design and settlements

• Initiated in November 2021
• Final report was published in May 2022
• BIS Innovation Hub
• Swiss National Bank (SNB)
• Financial Infrastructure Operator SIX
• Included 5 commercial banks in Phase II

Experiment with the integration of core banking system into W-CBDC in tokenised form based on distributed ledger technology (DLT)

• Phase I concluded in December 2020
• Phase II concluded in January 2022
• This test proved that it was possible to instantaneously execute payments ranging from 100,000 to 5 million Swiss francs while eliminating counterparty risks 11
• Bank of Thailand 
• Hong Kong Monetary Authority
• People’s Bank of China
• Central Bank of UAE

Explore a specialised platform for the implementation of multi-currency CBDC for cross-border payments

• Initiative lasted for six weeks starting in August 2022
• Over USD 12 million was issued on the platform, facilitating over 160 payment and FX PvP transactions totalling more than USD 22 million in value
• Saudi Central Bank (SAMA)
• Central Bank of United Arab Emirates (CBUAE)

Explore the feasibility of dual-issued digital currency for domestic and cross-border settlements

Announced in January 2019 as a joint initiative between Saudi and the UAE

Benefits of CBDC in India

Several central banks in emerging markets and developing economies are implementing retail CBDCs. Globally, if we consider the reasons behind the implementations across China, Mexico, Nigeria, Bahamas, Jamaica and the Caribbean Union, one of them is enhancing the efficiency of payment systems. In the case of India, the concept note published by the RBI in October 2022 has listed the following additional motivations:

Widen financial inclusion

Promote a cashless economy, boost payment innovation, curb money laundering, reduce operational costs and help achieve esg goals, simplify securities settlement.

Lack of infrastructure, poor connectivity and socioeconomic barriers contribute to lower financial inclusion (as per RBI reports, India’s FI-Index as of March 2022 is 56.4%). 13  A digital mode of currency that does not require a fully functional bank account and can work offline will provide a major boost to inclusion.

Precautionary cash holding during COVID-19 and the anonymous nature of cash transactions led to a rapid increase in cash usage during 2021–22. The introduction of CBDC with conditional anonymity will boost cashless transactions and thus be a step towards promoting a cashless economy.

CBDC can serve as a platform for payment innovation and provide diverse options to consumers. It is also free from credit and liquidity risks and hence removes barriers for firms to innovate new capabilities.

There is often a concern about privately issued digital assets and a sizable share of the population transacting, holding and trading in such assets. Unlike cryptocurrencies, CBDC is less vulnerable to volatility and instability, thus safeguarding individual rights.

The cost of cash management in India has been immense. The expenditure incurred on printing between April 2021 to March 2022 was INR 4,984 crore – a figure that excludes the ESG impact. 12   Apart from the high printing costs, it should be noted that the Government of India subsidises the usage of UPI. The introduction of CBDC will ease the pressure on the government in terms of printing, distribution and storage of currency, and also contribute to India’s ESG goals by helping reduce the carbon footprint.

Government securities can be settled using wholesale CBDC in India through a process known as delivery versus payment (DvP) settlement. DvP settlement is a mechanism used to ensure that the delivery and settlement of securities occur simultaneously. In India, the RBI has launched a pilot wholesale CBDC called the ‘Negotiated Dealing System-Order Matching (NDS-OM) CBDC’ which allows banks to buy or sell government securities.

CBDC initiative in India

In December 2022, the RBI launched the pilot for retail e-Rupee. This pilot was launched with the aim of creating a digital version that is similar to paper currency and gauge usage for ensuring a seamless transition to CBDC. The RBI is rolling out the digital currency via an intermediary model, with initial participation from eight banks in the country. As of February 2023, this pilot project was being conducted in five cities within closed user groups comprising merchants and customers on an invitation-basis only. Under this project, the RBI issues CBDCs to intermediary banks that issue digital wallets to the end users. Transactions will be performed in the same way as those involving physical currency. While the e-Rupee will not earn any interest, it can be converted into deposits.

Some features that the RBI plans to incorporate into the e-Rupee include:

• offline functionality to support usage of CBDC in low/no network conditions
• programmability for restricting government benefits/grants usage for a defined purpose at identified merchants
• interoperability for enabling both newer and legacy payment systems to operate seamlessly and improve the likelihood of adoption
• anonymity to guarantee an individual’s right to privacy as in the case of physical cash.

As the RBI moves ahead with its plan to implement a digital twin that can complement physical currency, boosted by state-of-the-art technology that offers a fast, efficient and seamless experience, our paper delves deeper to triage the best use cases and assess the challenges and potential risks with implementation and the way forward.

How does Indian CBDC compare with global retail CBDC?

The table below shows some of the key differences and similarities.

Key takeaways

• Central banks don’t intend to use CBDCs for monetary policy operations as making CBDCs interest bearing carries several risks such as cannibalising other short-term investment vehicles. Such a move could lead to adverse effects on the economic structure, such as shifting of deposits from banks to CBDC tokens.
• Most countries follow a hybrid model so that user interactions are seamless, and the end-to-end framework can be easily scaled up on the back of an application programming interface (API), which can support a higher throughput compared to the pure DLT framework on the user interaction end.
• Global central banks have realised that offline payments on CBDCs can provide a real value proposition to the economy’s objectives.

UPI versus CBDC

With the launch of e-Rupee, there is confusion around how UPI differs from CBDC. The table below explains the differences:

With rapid adoption and widespread usage, UPI has become a very popular mode of payment in India. UPI has been instrumental in accelerating the penetration of digital payments in India, making it a potential platform that can be merged with CBDC. This blend will serve as a better payment solution offering instantaneous fund transfers and accessibility.

Architecture of the retail CBDC (R-CBDC) ecosystem

India’s CBDC architecture is based on the two-tiered model which supports a majority of CBDC implementations across the globe.

Under this model, banking intermediaries distribute CBDCs to the population based on the MO supply provided by the central bank. A hyperledger fabric powers the interaction between central banks and commercial banks. Commercial banks and other authorised intermediaries are present as nodes in the distribution tier through which minted R-CBDC tokens are transferred from the central bank.

The utilisation/end-user interaction layer takes place on an API-based framework supported by an NPCI switch for routing interbank transactions.

Why has India chosen a two-tiered model?

• Separation of the core payment rail and utilisation improves throughput and ability to handle many transactions as the system achieves critical mass in the future.
• It is not the central bank’s domain to distribute money and provide payment services to end users.
• Through a bespoke model, the central bank wants to reduce disintermediation risk and is inclusive of PSPs that are already providing digital payment services through alternative payment rails like UPI.
• For the system to scale up, it is a prudent measure to reuse/recreate an existing framework with enhanced functionalities to achieve the core objectives for the digital rupee.

The following is an illustrative representation of the end-to-end architecture for the pilot phase of the Indian CBDC:

End-to-end architecture for the digital rupee pilot

The RBI is in charge of issuing tokens and has direct liability. As mentioned earlier, the core ledgers are based on a DLT-based hyperledger fabric which has one or many nodes for the central bank and commercial banks to issue tokens as a primary objective. The core system oversees the governance of nodes and communication with the core infrastructure.

The retail layer of the solution is inspired by the API infrastructure of UPI and leverages and reuses many API libraries to create minimum disruption for the ecosystem players. The retail layer has not been placed on DLT intentionally, primarily because of scalability and throughput challenges faced related to this technology.

The tiers consist of intermediaries who play a vital role in onboarding customers, providing digital wallets and overseeing the distribution of tokens. Thus, the role of intermediaries includes account management, e-KYC, wallet management, transaction reporting and API integration with the RBI. The distribution layer is connected to the retail layer through APIs and directly issues tokens to the digital vault. The digital vault is the source of funds for wallets which connect to the issuer switch and CBDC switch for distribution, issuance and transactions. The wallet interface is connected to the bank’s retail token service layer through API integration.

The end-user experience for an R-CBDC would depend on the specific design and implementation of the digital currency. However, in general, the following aspects can be expected:

• Accessibility
• Convenience
• Interoperability
• Transparency

An R-CBDC is typically designed to be easily accessible to the general public, allowing anyone with a compatible device to hold and use the currency. 24/7 access to the digital wallet will allow end users to make a transaction and manage their funds at any time.

With an R-CBDC, users can transact and transfer funds digitally without needing a physical currency or intermediaries such as banks. This can make the process faster and more convenient.

R-CBDCs are often built with advanced security features to protect users’ funds and ensure the integrity of the currency. This can include encryption, multi-factor authentication, biometric authentication and secure storage solutions.

R-CBDCs are typically designed to work seamlessly with existing payment systems and infrastructure, making it easy for users to use the currency in their day-to-day transactions.

CBDCs can offer a more transparent and accountable monetary system, allowing for better tracking and management of monetary policy by the central bank.

For the current R-CBDC pilot in India, the following end-user experience has been designed:

End-user experience

Creating a wallet.

• E-wallet: The e-wallet interface is a front-end solution with effortless onboarding. With its low cost and simplified features, an e-wallet can act as a catalyst for CBDC adoption.
• Account creation: Account creation would typically involve providing personal information, verifying identity and setting up authentication methods for accessing e-wallets. Account management can be enabled with a strong identity and access management feature with underlying fraud and cybersecurity monitoring. There are three main categories of KYC (no KYC, minimum KYC and full KYC) and the user self-registration process has been defined accordingly. Aadhar-based OTP is being used for one-time user authentication.
• Loading and unloading: The user has to link any one of the onboarded banks to load and unload R-CBDC tokens from their bank account.
• Wallet features: The wallet allows the user to check the current balance along with the denomination of the tokens available. A user can view his/her past transaction history as well as individual transaction receipts or acknowledgment copies.
• Security: Token management will entail robust anti-counterfeiting measures, auto-locking, freezing of breached accounts and continuous availability of systems. Additional measures must be taken to counter the potential vulnerabilities and safeguard the stored value of tokens.

Spending CBDC

The end user can spend CBDC by making purchases at merchants, i.e. P2M payment, or by transferring it to another person, i.e. P2P. For this, the user has two options for searching for a beneficiary – scanning the QR code or by entering the mobile number that accepts CBDC. The end user would simply need to use their digital wallet to initiate the transaction and confirm the details. There is an authentication password/PIN similar to UPI which the user needs to input to authenticate the payment.

Transactions should be enabled for continuous 24x7x365 functionality, offering operational resilience with minimal latency. This will enable real-time transaction settlement with minimal failure rates, leading to rapid adoption.

Receiving CBDC

The end user can receive CBDC in their digital wallet through various means such as direct deposit from an employer, peer-to-peer transactions or a central bank-operated platform.

The overall user experience of the R-CBDC e-wallet has intentionally been made to closely resemble the UPI user journey to minimise the user’s learning curve and foster quick adoption.

Functions and role considerations of the end-to-end CBDC framework 13

Core system.

• Core rulebook: The RBI is the apex body for defining the principles of CBDC usage, outlining the legal basis, governance, risk management and access requirements for participants.
• Core infrastructure: Issuing and redeeming CBDC is a core central bank function with certain technical aspects outsourced to third-party vendors.

Broader ecosystem

• Processing infrastructure: The open infrastructure at the payment layer is facilitated by APIs between commercial bank participants to aid in message preparation, processing and reconciliation.
• Processing services: Banks run the following functions which are inherent to guiding transactions from initiation to completion: (a) limit check and fund availability, (b) authorisation, verification and validation, and (c) screening.
• End-user interaction: The following services are provided by banks through payment applications: (a) pre-transaction – channel access and onboarding of users, (b) execution – payment instruction and authentication, and (c) post-transaction – advice statements and confirmations.
• Use case arrangements: Technical and business rules on how a use case should flow within an application are determined by the bank maintaining the CBDC application.

Potential challenges with implementation

The introduction of any new system in a vast market like India will entail some challenges. Some of the major challenges related to the implementation of CBDC are discussed below:

Ensuring consumer privacy and wallet security

System scalability, data management and retention, accelerated adoption, awareness and acceptability.

• The governance policy should make up for the lack of personal data protection regulations and be flexible enough to adapt to the dynamic socio-economic system.
• Robust data security systems and stringent data access rules such as multi-level protection strategies and advanced intrusion detection systems must be examined before implementation to prevent any cyberattacks and breaches.
• Absolute anonymity may fuel money laundering and terrorist financing activities. Hence, defining the right regulatory framework with restrictions and gatekeeping conditions is a must.
• DLT-based implementations are faced with potential scalability issues and performance concerns; proper research must be done on permissioned DLT to counter these concerns.
• Ensuring consistent transaction processing across all channels is paramount and hence correct execution of transactions is necessary even in the case of unforeseen events.
• Precise estimation of volumes of users and transactions is key to evaluating multi-server computing systems and data syncing needs for performance.
• The KYC process should have stringent data processing and controls in place that make payment data accessible to end users and intermediaries only.
• Data management for anonymous low-value transactions and large-value transactions can be challenging, but the challenges can be mitigated by implementing identifiers or hash codes.
• Absolute anonymity within transactions will offer little insight into the movement of CBDCs and payment trends. Hence, striking a balance between data utilisation and consumer privacy is key to designing the right data model.
• Policymakers should consider incentivising adoption of e-Rupee by not only end users but also intermediaries as the requisite technologies to implement the e-Rupee infrastructure may not be financially viable.
• Intermediaries can capitalise on e-Rupee by ensuring that the underlying technology is interoperable with legacy payment rails and enabling smooth integration with third-party PSPs for innovations.
• Features such as programmability, offline modes, stability, language support, etc., must be incorporated to drive adoption among end users in both urban and rural areas.
• Establishing the right use case and motivations for the masses to move away from bank accounts to CBDC wallets can lead to increasing stickiness.
• Driving acceptability by conducting awareness initiatives in the right forums based on audience type, namely urban and rural.
• Initiatives like Jan Dhan Yojana should be implemented in the case of CBDC wallets to make it mainstream and increase financial inclusion among the rural population.

Future roadmap

India is one of the largest economies in the world with a large and diverse population, so there are varied expectations from the CBDC pilot with several use cases and business models expected to emerge as the ecosystem scales up. Future use cases and key considerations related to the CBDC ecosystem are outlined below:

• Retail cross-border remittances: A retail CBDC can help reduce the cost and increase the speed and reliability of remittances, especially for migrant workers who send money back to their families in India.
• Microfinance: R-CBDCs can help support microfinance activities such as small loans and savings by providing a secure and accessible digital platform that embeds features like programmability and supports alternative underwriting models, digital onboarding, documentation, etc.
• Programmability: The programmability of CBDCs can streamline direct disbursal, thereby widening financial inclusion.
• Offline payments: Enabling payments in the offline mode is imperative for reaching the last layer. Given that CBDCs represent tokens, they are suited to offline transactions.

Retail use cases

• Interbank settlements: One of the primary use cases of wholesale CBDC is facilitation of interbank settlements. Atomic swaps could improve the efficiency of settlements through automation based on predefined conditions. Wholesale CBDC also helps in reducing counterparty and liquidity risk between banks, as well as settlement times and costs. DLT-based smart contracts could enable round-the-clock settlement with a wider range of assets and a broader range of participants like non-financial corporations.
• Improvement in cross-border transactions: India has the highest inward remittances in the world at USD 89,127 million in FY21–22 14  and the cost of sending these remittances assumes critical relevance. Cross-border payment transformation via CBDC will address challenges such as low speed, high costs, and lack of transparency in settlement. The CBDC will accelerate the settlement process and overcome time zone issues and exchange rate differences.
• Money market: Wholesale CBDC can also be used to facilitate trading in money markets, such as repo markets and interbank lending. This can lead to more efficient and transparent pricing of money market instruments. Additionally, it can reduce counterparty risks and increase transparency.

Wholesale use cases

• The impact of an Indian CBDC on global trade would depend on a variety of factors, including the adoption rate of the Indian CBDC, the functionality and features of the CBDC, and the overall state of India’s economy and trade relations with the world.
• Given the current global geopolitical situation and the willingness of at least the BRICS countries to move away from US dollars as the primary instrument for global trade, there could be widespread adoption of an Indian CBDC. If that happens, it could have several benefits for India’s global trade. For one, it could make cross-border transactions faster, cheaper and more secure, potentially increasing the efficiency of global trade with India. Additionally, an Indian CBDC could help reduce currency exchange risks and costs for international buyers and sellers, making Indian goods and services more attractive in the global market.
• However, the impact of an Indian CBDC on global trade could also be influenced by external factors, such as the stance of other countries on CBDCs and the overall global economic climate. For example, if other major trading partners of India do not adopt CBDCs, the benefits of an Indian CBDC may be limited. Additionally, if the global economy is experiencing a downturn, the impact of an Indian CBDC on trade may be mitigated.
• There could even be technological limitations with respect to the integration of the country’s CBDC networks given that there is no single standard of implementation and various technologies are being adopted by other countries.
• Overall, it is difficult to predict the exact impact of an Indian CBDC on global trade till such time that there is more information available on the broader economic conditions at play.

Impact of CBDC on global trade

Key considerations for increasing adoption/usage

• Policy framework
• Business case
• Anonymity: There are expectations of a tiered anonymity framework with a threshold value for transactions. Beyond that, additional KYC requirements might be sought.
• Prioritise the best interests of citizens, especially vulnerable populations, when collecting data.
• Limit the collection of personally identifiable information to what is necessary.
• Double down on resiliency: Layer built-in risk controls like fraud protection and compliance.
• Scaling up central infrastructure: Given that CBDC demands controllable decentralisation and supervision, emphasis should be laid on modular DLT architecture as transactions and throughputs increase within the framework.
• Operational efficiency: Expand computing or operational capacity by setting rules for the distribution layer and let ecosystem players determine on-demand computing capacity as per adoption.
• Viable business case: It will be important to define a viable business case that players can target which includes not only typical CBDC features but also new ones such as programmability and offline-based features.
• Technology enablers: Open APIs are expected to play a key part in creating a level playing field that can help ecosystem players to innovate and create new use cases with supervised access to the backend.
• Services: Banks and non-banks need to build core value propositions to build a CBDC portfolio with key areas including access-based services, user applications, e-wallets, processing support and technology vendors.

The rollout of CBDC or e-Rupee is a giant leap in India’s digital transformation efforts. In view of the recent phasing out of the INR 2,000 denomination banknote, CBDC may just be the apt currency for financial transactions that the country needs to usher in more trust, resilience and efficiency in currency management. If the potential challenges in its implementation are addressed, CBDC could increase ease of doing business by overcoming geographical barriers. Cash usage has declined, paving the way for the emergence of alternative payment currencies and modes that are mostly decentralised. In this context, CBDC can ensure financial and environmental stability and financial inclusion, and catalyse innovation.

Author introductions:

Mihir Gandhi is Partner and Payments Transformation Leader

Zubin Tafti is Executive Director, Payments Transformation

Also contributing to this article were  Kanishk Sarkar ,  Karan Mahajan ,  Pratik Sinha  and  Antara Dutta .

• India saw record of ₹149.5 trillion UPI, card transactions in 2022; this city tops the list
• Digital rupee to save costs of printing distributing and storing cash
• Circulation of fake currency notes continues to pose challenge
• Concept note of CBDC
• Design Consideration for CBDC
• Central bank digital currency tracker
• Bank for international settlements
• Switzerland tests digital currency payments
• Connecting economies through CBDC
• RBI's financial inclusion index rose to 56.4 in March 2022
• Digital currency to reduce RBI’s cash management costs
• Central bank digital currencies: system design and interoperability
• India received highest ever foreign inward remittances in a single year

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CURRENT AFFAIRS: Topical Analysis

Topical Analysis: Digital Currency Revolution in India.

Published: 21st Apr, 2022

Past 2010 digital payments to India is unknown but now-a-days digital payments overtake the conventional method of payments, Especially due to COVID-19 pandemic and SOP to contain spread of virus digital payments were preferred than that of conventional payment method’s. Since its inception in 2016 the value of monthly UPI transactions for four years comprises of 3-lakh-crore by 2020 September. Astonishingly the payments doubled to Rs 7 Lakh- crore in a year owing the due credits to cheaper internet data, growth of smart phone usage and exponential growth of digital payments platforms.

This as a part of digital payment system said to be a revolutionary step towards digitalisation of currency in India. Unified Payments Interface (UPI) has been at the forefront of India’s digital payments revolution, making faster inroads into retail payments than any other online mode, monthly transactions value clocked by UPI vaulting from ₹1.8-lakh crore in November 2019 to ₹7.6-lakh crore by November 2021. While credit and debit card payments flat-lined at ₹13-lakh crore between FY19 and FY21 and use of IMPS grew from ₹2-lakh crore to ₹3.6-lakh crore, UPI payments have jumped from ₹8.7-lakh crore to ₹41-lakh crore. 

To ensure that digital transactions are both affordable to users and remunerative to service providers, RBI plans to issue a discussion paper specifying transaction charges across digital modes. The time is opportune for RBI to redouble efforts to wean the economy away from cash to digital modes.

Digital currency in various parts of world.

Digital currency is a form of currency that is available only in digital or electronic form. It is also called digital money, electronic money, electronic currency, or cybercash, has utility similar to physical currencies also be used to purchase goods and pay for services.

• Digital currencies also enable instant transactions that can be seamlessly executed across borders. Typical digital currencies do not require intermediaries and are often the cheapest method for trading currencies.
• All crypto currencies are digital currencies, but not all digital currencies are crypto currencies.

CBDC (Central Bank Digital Currency) is the digital form of fiat currency issued and regulated by central bank of a country which promotes financial inclusion and simplify implementation of fiscal and monetary policy.

CBDC’s are of 2 types:

• Wholesale CBDC, primarily used by financial institutions.
• Retail CBDC, used by consumers and businesses similar to physical form of currency.

Across the world, only 9 countries launched CBDC and 80 countries with CBDC initiatives are underway till date. 

Finance minister during budget session 2022 announed; CBDC in India will be ready by 2023 and overseen by RBI.

Are crypto currency and digital currency same? What are the differences?

Finance minister announced during budget session 2022-2023 that “Non Fungible Tokens”-NFT’s will be taxed at 30% on any income from their transfer. On the same stage finance minister also announced rolling out of “Digital currency” by RBI sooner in 2023 called after “The Central Bank Digital Currency (CBDC)”.

Here, erupts a conflict on the weather digital currency and crypto currency are same? But the idea of digital currency is different from crypto currency as follows:

• Digital currency is a legal tender issued by RBI mostly centralised, where as crypto currencies are decentralised and run by single group or community which are not yet accepted as legal tender in India.

How is Digital currency different from UPI payments?

Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.

• Digital Rupee/ currency in itself will be the underlying payment mode that can be used for digital payments in lieu of currency/cash. “The payment rails like UPI, IMPS etc use the underlying currency/cash to transfer the funds.
• Currently, UPI payments are made using the digital equivalent of existing currency notes. That means every rupee transferred via UPI is backed by physical currency. “The digital rupee will be legal tender in and of itself and need not necessarily be backed up by physical currency
• The digital rupee/ currency will be operated by RBI and not by bank intermediaries in the case of UPI where each bank has a different UPI handler. Digital rupee will be Settled by RBI instantly, where as UPI payments were settled by transacting bank with RBI

Role of Digital currency in financial inclusion

• Retail CBDCs can help reshaping a financial system into one that is more accessible to the unbanked and under banked. Retail CBDCs are issued by a central bank directly to people without going through traditional bank accounts. In this system, individuals have CBDC accounts directly on the central bank core ledger.
• By establishing a more inclusive digital payments ecosystem and
• Creating financial data identities.
• It transforms the payments ecosystem ; management of physical currency is expensive and should hold a wider network/ chain of branches of banks to deal with. Whereas digital currency reduces this expenditure on maintenance, Resulting in including more people into the financial ecosystem.
• The high cost for small ticket size financial transaction in conventional financial system makes the transactions unviable. Digital currency and mobile technology can cater the needs of small transaction at affordable cost. It can also help reducing time, more accurately and make faster transactions in bulk.
• Many emerging economies like India, Brazil, and Nigeria have embarked on mobile technology to overcome financial exclusion.
• Arguments for CBDC increasing digital currency:
• Digitizing the value chains in the economy.
• People can access a wide range of digital financial products and services that are not easily accessible when using cash.
• Can help to enlarge the digital economy, where service provides develop API (Application Programming Interface) used to serve better for customers on real time basis.
• It allows faster payment settlements enabling more transparency.
• The advantage of a CBDC has offline features as well that helps people in remote areas where there is no internet connectivity, will be able to use retail CBDC conveniently .

Advantages of digital currency:

There are many advantages of digital currency including:

• It is Free from credit and liquidity risk as it curbs financial misuse such as; Fake currency printing, money laundering and so on.
• Cross-border payment improves; with this digital mode it creates an eco system of similar currency even at distant places.
• Financial inclusion will took place as it will be accessible to everyone in the society, expanding peer to peer transactions.
• Expands access to the general public through API.
• It is more secure compared to conventional payment as it is more discrete and confidential.
• Reliable and faster way of transaction with fewer charges.
• Helps in saving tonnes of paper in banking sector as it will completely run on digital platform.
• As it is centralised, Regulating will be easier.

Disadvantages of digital currency:

• Concerns of cyber attacks, as data are the mostly held in digital devices.
• As it requires less number of people, will result in loss of employment in financial sector.
• In rural areas implementation will be a great task, where internet connectivity is low.
• Chances of generating digital divide.
• Non-interest bearing CBDCs hinders financial inclusion.
• Digital illiteracy may act as barrier.
• Privacy concerns may turn up.

Regulations related to digital currency in India:

Digital currency in India is how ever yet to be launched but the digital payments and crypto currencies were regulated to secure India’s soverign digital currency by restricting the role existing crypto currencies which can form as a great threat to economy.

" The Crypto currency and Regulation of Official Digital Currency Bill, 2021 ".  Is the only bill introduced in parliament related to crypto currency regulation in India which has major provisions such as

• Ban on crypto currencies:  The draft Bill bans the use of crypto currency as legal tender or currency.  It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of crypto currency. 
• Use as a medium of exchange, store of value or unit of account.
• Use as a payment system.
• Providing services such as registering, trading, selling or clearing of crypto currency to individuals.
• Trading it with other currencies.
• Issuing financial products related to it
• Using it as a basis of credit
• Issuing it as a means of raising funds, and
• Issuing it as a means for investment.
• Under the Bill, mining, holding, selling, issuing, transferring or using crypto currency is punishable with a fine or imprisonment of up to 10 years, or both.
• Issuing any advertisement, soliciting, assisting or inducing participation in use of crypto currency is punishable with a fine or imprisonment of up to seven years, or both
• The Bill provides for a transition period of 90 days from the commencement of the Act, during which a person may dispose of any crypto currency in their possession, as per the rules notified by the government.

The Inter-Ministerial Committee (2019) noted that the technology underlying crypto currencies i.e., DLT, could improve the efficiency and inclusiveness of the financial system. It can help lower the costs of personal identification for KYC, and improve access to credit.  Global regulators (such as IMF) have also noted benefits of crypto currencies. These currencies could provide cheaper, faster and more efficient transactions.

 Comparison of penalties prescribed under various economic offences

How digital currency helps in India’s goal of 5 trillion dollar economy and challenge’s there in?

The digital currency plays a major role if considered in achieving 5 trillion dollar economy by 2025 based on its advantages over conventional currency, but the digital currency not yet rolled out and will ready by 2023 can be a challenge to Indian’s goal to become 5 trillion dollar economy. Additionally, the recent pandemic pushed back the growth rate and settled down at 8.2% for FY2023 following the ongoing Russia-Ukraine war.

According to the World Bank, India needs to create 8.1 million jobs annually to achieve its growth targets. But on other hand, The NASSCOM has recently said that the Indian Crypto currency market has been growing exponentially over the last few years and is expected to reach up to $241 million by 2030 in India and $2.3 billion by 2026 globally.

A recent study on “Crypto Industry in India” by the NASSCOM and industry partner WazirX also said that the Indian investors have shown keen interest towards adopting Crypto currencies such as Bitcoin, Ethereum, and Polygon to make investments that promise them viable returns. 

Former RBI Governor Raghuram Rajan, while addressing Reuters Markets Forum recently, had also endorsed the potential in Crypto currencies. The Crypto currency might find a way to become an effective means of payment, he had added.

Challenges:

• In terms of digital currency and 5 trillion dollar economy, the challenges are:
• Lack of implementation of various digital currencies in India.
• More restricted rules for crypto currency users and providers.
• Prolonged delay in rolling out sovereign digital currency (CBDC).
• Less active participation of various age groups in digital currency
• Lack of knowledge about crypto currencies and various other digital currencies.

Way forward:

India as 3rd largest economy in the world, its ambition to join 5 trillion dollar economy club is a great challenge ahead as there are many issues within the country, across the neighbourhood and environmental concerns posing continues obstacles for growth. The growth in digital payments in India and thriving for CBDCs can enhance the efficiency of digital payments. Whether CBDC will eventually increase financial inclusion depends on the CBDC design. However the digital transactions growth in India is throwing a positive ray of hope on India’s digital currency revolution.

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The Future of Digital Currency in India

Ganesh Kumar, GLG Network Member and former Executive Director of the Reserve Bank of India GLG Webcast Date: April 19, 2022

Read Time: 4 Minutes

While enjoying the look, feel, and touch of cash is part of its ethos, India is nevertheless on the road to currency digitization. The Reserve Bank of India is scheduled to introduce a digital currency sometime before March 2023 , which is the end of the current financial year. Currently, that currency does not have a name, but its purpose is to provide almost all the features that now come with cash, albeit being in a digital mode.

Today, digital transactions leave an audit trail and a trace. Information about identity, purchases, and location is known every time a debit or credit card is swiped. Another difference between a cash transaction and a digital one currently is that with cash, settlement happens at the time of the transaction. In other words, it is a “delivery-versus-payment” arrangement. In today’s digital transactions, however, payments are made at the time of settlement, which occurs with a time lag after the transaction. The preference for a delivery-versus-payment situation in which the buyer doesn’t part with the payment until there is the assurance of delivery is perhaps one of the strong motivators for people to still like using cash.

Of course, continuing to have physical, paper-based currency in circulation at the same time that a digital currency is in use doesn’t quite gel with most visions of the future. That is why the Reserve Bank’s upcoming digital currency is so important and so different.

Digital Currency Is Not Private Crypto

First, central bank digital currency (CBDC) will be different from Bitcoin, Ethereum, and other cryptocurrencies, which are not actually equivalent to sovereign currencies in most countries, including India, because they are not authorized means of payment and do not have a legal backing. A central bank digital currency can be used to offset payment obligations with certainty, which a private digital currency cannot achieve.

Second, there is no clarity on either ownership or quantum of private digital currencies (assets?) in circulation. There are only guesses as to the creator of Bitcoin, Ethereum, Ripple and others. As a result, there is no guarantee that the value stored in the form of a private digital currency will necessarily be paid and that it is a stable value at all times. Contrast that with a digital currency from a central bank, which typically is backed by a sovereign nation. Even if something were to go wrong — say, in the IT system, or some other unforeseen contingency — the holder of that bank’s currency, whether in physical or digital form, has confidence that the value of that currency will be available to him at all times.

The Reserve Bank of India has not yet defined the term “cryptocurrency,” but I believe it will define today’s private cryptocurrencies as an asset similar to a share of stock. The definition also would cover new crypto products such as nonfungible tokens.

Retail Payments in India

In recent years, India’s retail payments system has grown more sophisticated, more dynamic, and much larger. The broad payment space includes several payment system operators, wallet companies, and the providers to operators and card companies. These companies have grown more profitable as customers enjoy more choice.

The Reserve Bank has helped the industry grow through its Real Time Gross Settlement system, which ensures funds transfers within seconds for large values, and its National Electronic Funds Transfer system, for retail transfers. Then there is UPI, the Unified Payments Interface , which is an instant real-time payment system that facilitates interbank peer-to-peer and person-to-merchant transactions. The QR-code-based system was developed by the National Payments Corporation of India , the umbrella organization for operating retail payments and settlement systems created by the Reserve Bank of India and the Indian Banks’ Association.

The Velocity of Money

Depending on a transaction’s purpose, funds can move digitally in many ways now in India. In fact, one of the most exciting aspects of the digitization of the payment system and the coming of true digital currency is that the faster flow of money, which digitization encourages, is very positive for the Indian economy. The speed with which money turns over in the economy, or its velocity, is a measure of an economy’s dynamism. The greater the velocity, the greater the economic growth.

If India’s goal is to become a superpower with a large GDP, the faster the movement of money the better, and if speed is the goal, digitization is the route. Newer digital forms that are safe, secure, convenient, and easy to use will power India into the future. The coming digital currency from India’s central bank will be a major step in that direction.

About S. Ganesh Kumar

Ganesh Kumar was formerly Executive Director of the Reserve Bank of India, where he led the departments of information technology, payment and settlement systems, external investments, and operations. Prior to his promotion to Executive Director, Kumar was Chief General Manager-in-Charge in the department of information technology.

This financial industry article is adapted from the GLG Webcast “Digital India and the Central Bank’s Digital Currency.” If you would like access to this teleconference or would like to speak with central banking experts like S. Ganesh Kumar or any of our approximately 1 million experts, contact us.

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Central Bank Digital Currency in India: The Case for a Digital Rupee

COMPETITIVE ADVANTAGE, STRATEGY AND INNOVATION IN AFRICA: Issues & Applications

20 Pages Posted: 22 Nov 2022 Last revised: 3 Apr 2023

Peterson K Ozili

Central Bank of Nigeria

Date Written: October 5, 2022

This article explores the benefits and issues surrounding the digital Rupee, also known as the eRupee or the central bank digital currency in India. The study found that Indian people who were interested in ‘cryptocurrency’ information were also interested in ‘central bank digital currency’ information. The study also showed that the introduction of CBDC has potential benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs and reduced settlement risk. However, the India CBDC has associated risks that need to be carefully evaluated against the potential benefits. The introduction of a digital rupee or CBDC in India will require legal and regulatory changes to make the phased CBDC implementation possible.

Keywords: India, CBDC, cryptocurrency, digital rupee, central bank digital currency, blockchain, distributed ledger technology. CBDC design, financial stability, monetary policy.

JEL Classification: G21, G28

Suggested Citation: Suggested Citation

Peterson K Ozili (Contact Author)

Central bank of nigeria ( email ).

Abuja Abuja, 09 Nigeria

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Central Bank Digital Currency - The ‘digital rupee’ in India

Central Bank Digital Currency (CBDC) is a digital counterpart of government-backed fiat money. This kind of digital currency is connected to the nation's currency and issued by its central bank. The same would be the case with the ‘digital rupee’ in India as it will be backed by the central bank of India, i.e. RBI. The development of CBDCs is underway in more than 100 nations across the world, and it is in various phases. Some countries have already released their digital currencies, while some have abandoned or stopped working on their initiatives. Despite being strongly inspired by bitcoins, the idea of CBDCs differs from decentralised virtual currencies and crypto assets, which are not issued by the government and do not have the status of "legal tender." With the rising demand for cryptocurrencies, there is a rise in the government's concerns about the risks associated with the same and its tendency to facilitate money laundering and other forms of criminal financing, and thus the concept of CBDC is gaining momentum. Even though the RBI supports the growth of virtual and online currencies, it does not support ones like bitcoin because it is impossible to monitor their end-use. It is preferred to introduce CBDC in order to track end-to-end virtual currency usage. The article sheds light on what digital currency is, how it differs from cryptocurrencies, why it has had such a surge in popularity recently, as well as the problems and risks that come with using it.

Introduction

Traditional banking and financial systems are transforming across the globe owing to the effects of the Covid-19 epidemic, shifting trading dynamics, and pervasive technological advancements. Post demonetisation in 2016 and the launch of digital India initiative, the government in India has been stressing on the use of digital space and digital money. The current Union Budget Finance Minister, Nirmala Sitharaman announced the introduction of Central Bank Digital Currency which is popularly known as “CBDC”. The Reserve Bank of India (RBI) is seriously considering introducing its own Central Bank Digital Currency (CBDC) this fiscal year, which will first be restricted to usage by wholesale businesses only. Given this, the RBI submitted a proposal to the central government in October 2021 to alter the RBI Act, 1934 to expand the definition of "banknote" to encompass currency in digital form. The central bank stated in its annual report (published in May 2022) that it was considering the benefits and pitfalls of introducing CBDC in India while moving gradually through the phases of proof-of-concept, pilots, and launch. "The Reserve Bank is engaged in introducing a central bank digital currency (CBDC) in India. The design of CBDC needs to be in conformity with the stated objectives of monetary policy, financial stability and efficient operations of currency and payment systems,” the RBI said in its report. With the declaration of CBDC in the Union Budget and subsequent enactment of the Finance Bill containing the necessary amendments to the RBI Act, 1934 the necessary legal foundation for CBDC's establishment has been laid and therefore the RBI is now responsible for ensuring that the digital currency that will be introduced achieves the goals that have been set for its introduction.

What is a central bank digital currency or CBDC?

According to RBI, "A CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different". In other words, digital currency is a digitised or virtual version of domestic currency that is equal to physical cash. CBDC, though a virtual or digital currency, differs from private cryptocurrencies in that it satisfies a key requirement of the definition of a currency being backed and issued by a central bank. CBDC is the same as money issued by a central bank, except it doesn't come in paper form (or polymer). It is a sovereign currency in electronic form and would appear as a liability (currency in circulation) on the balance sheet of the central bank of India.                     

Hence, Central bank digital currency is ….

• the legal tender
• issued and governed by the central bank
• is in digital form
• same as a fiat currency
• will be based on blockchain technology

  Although CBDC is a virtual or digital currency, it cannot be compared to the private virtual currencies or cryptocurrencies that have exploded over the past ten years. It is also essential to understand the difference between CBDC and cryptocurrencies. Not all digital currencies are cryptocurrencies, but all cryptocurrencies are digital currencies. Digital currency may not be encrypted, but cryptocurrency operates in an encrypted format through blockchain technology. Since there is no issuer, private virtual currencies do not represent any person's debt or liabilities.

What are the drivers of CBDC?

The majority of central banks throughout the world are experimenting with digital currency to combat the current wave of virtual currencies or cryptocurrencies. Private or decentralised money is not something that the central bank can regulate, and it also poses a challenge to the sovereignty of their national currency as the public is responsible for both the creation and upkeep of these virtual currencies. The central bank can prevent these misdeeds by regulating the digital currency. That is why most central banks, including those in Sweden, China, and the EU, are developing their own CBDC. Another issue with cryptocurrencies is that their value is purely based on speculations because they are not linked to any assets or currencies (demand and supply). As a result, the value of cryptocurrencies like bitcoin has fluctuated greatly. As CBDCs are issued by central banks, their demand and supply can be regulated and they can be used as a monitoring tool. CBDC may be able to provide better resilience, higher safety, greater availability, and lower prices than private forms of digital money if they are wisely structured. A CBDC may possibly be a crucial step toward financial inclusion. Although the availability of payment services has increased recently, only some have access to them. People with low incomes and those who live in rural areas still need help accepting digital payments. Payments across borders, especially for small-value transfers like remittances, can be difficult and expensive for domestic retail payment systems. CBDCs can aid in extending the public's access to public funds. The adoption of digital payments can be accelerated by central banks with the support of CBDCs, especially when the market and profit opportunities are insufficient to spur private sector innovation and handle the associated risks. Digital forms' ease of use and security is another benefit favouring CBDC. It is always more convenient and secure to carry digital money than carrying actual cash. It combines the conventional approach with the innovative approach. CBDC can gradually enact a cultural shift in favour of virtual money by reducing the costs associated with currency management. CBDC is designed to combine the security and convenience of digital cash with the reserve-backed money circulation of the traditional banking system.

Why has CBDC suddenly gained popularity in India?

The Reserve Bank of India (RBI) has been studying the possibility of introducing a central bank digital currency (CBDC) since at least 2013. It is unclear what the benefits would be to the RBI in issuing a CBDC. Still, it is being argued that it would allow for better control and oversight of the domestic money supply and financial stability. Several nations are developing CBDCs, and a few have even implemented them. As of August 2022, 11 countries(The Bahamas, Nigeria, Jamaica and eight countries of the Eastern Caribbean Union ) have already launched their digital currencies. Many including China are still testing and developing their CBDCs. The drivers for CBDC in India are many and varied. But, at its core, the need for CBDC stems from the desire for a more efficient and inclusive monetary system. The current monetary system in India is based on paper currency, which is subject to wear and tear, as well as counterfeiting. This means that there are significant costs associated with its production and distribution. In addition, paper currency is also inefficient in terms of storage and transport. This will also ensure that India remains at the forefront of innovation in the global financial system and does not fall behind other countries in terms of implementing new technologies.

In addition, CBDC would also allow for greater inclusion by expanding access of financial services to those who are currently excluded from the formal banking system. At present, there are around 1.2 billion people in India who do not have access to formal banking services. This means they miss out on opportunities to save and build financial resilience. A CBDC could address this by providing a safe and convenient way for people to store and use money without going through a bank.

CBDC, or the digital rupee, can be used in many real-world applications, such as programmable payments for subsidies and quicker lending and payments by financial institutions. A practical transition to a cashless economy may occur soon, and this might strengthen the government's emphasis on cashless transactions. Cross-border remittances may gain from increased use of CBDC as an environment for interoperability may be established, allowing for faster real-time transmission.

Finally, CBDC could help to reduce the cost of printing and circulating paper currency. CBDC would mitigate these costs by being digital and therefore more secure and less expensive to produce. In addition, banks charge high fees for certain services, such as international money transfers; with CBDCs, these fees could be reduced or may not even be required, as there would be no need for banks to process the transactions. CBDCs might also make it possible for payment systems to be more quick, easy and global. It is possible for an Indian importer to directly pay a foreign exporter in digital dollars without using a middleman; the transaction would be final.

How CBDC differs from other digital mechanisms, and why is it considered better?

There are numerous ways and platforms available for digital payments. However, a CBDC or Central Bank Digital Currency has some advantages over other alternatives, and these are:

1. As the government's central bank backs CBDC, it is regarded as being more stable than cryptocurrencies, which may be very volatile.

2. Large transactions can be made using a CBDC without worrying about the cap imposed by cryptocurrency.

3. A CBDC is faster and more efficient than other digital payment methods, such as blockchain-based payments.

4. As it would be harder to launder money via a CBDC than other digital payment systems, a CBDC can assist in reducing crime.

Digital currency will be different from Unified Payments Interface (UPI), which is a system that powers multiple bank accounts into a single mobile application. The underlying currency or cash is used to transmit funds through payment channels like UPI, so UPI payments are currently made with the digital equivalent of physical cash notes. This means that each rupee moved through UPI is backed by actual money, whereas in the case of CBDC, the underlying payment method will be the Digital Rupee, and there won't be a need to back it by real money because it will be legal tender in and of itself.

The digital rupee will be run by RBI rather by bank intermediates, as is the case with UPI, where each bank has a different UPI handler, which is the other point of distinction. Furthermore, Digital Rupee transactions will be instantly settled. Currently, UPI payments rely on the settlement of the transacting banks with the RBI; however, since Digital Rupee will be transacting straight from the RBI, it will be settled immediately.

What are the risks of a CBDC?

The Indian government is in the process of issuing CBDC but there are risks associated with such a move. For example, if a CBDC is poorly designed, it could lead to increased cyber security risks or be subject to fraud and other types of crime. One of the key risks is the potential for CBDC to be used for money laundering and terrorist financing. Another risk is that CBDC could undermine the existing financial system, which is already struggling to cope with high levels of non-performing loans. There is also the possibility that CBDC could lead to inflation if it is not managed properly.

Banks in India have also raised their disintermediation concerns over RBI’s digital currency plans. Banks worry about the potential long-term effects if the central bank takes on the role of keeping and dispersing digital currency, eliminating banks as an intermediary between customers and the RBI. This could lead to a decrease in deposits, and if banks start to lose deposits over time, it will limit their ability to extend credit. Additionally, when banks lose sizable amounts of low-cost transaction deposits, their interest margin may be put under pressure, raising the cost of loan. RBI has taken all these concerns into perspective and has decided to move slowly and steadily, wherein the initial focus area is wholesale CBDC. Wholesale CBDCs means it will be used to facilitate payment between RBI and commercial banks and entities that hold accounts with central banks. Due to its potential to make current wholesale financial systems more efficient, accessible, and secure, the wholesale CBDC is thought to be the most well-liked concept among central banks.

Privacy concerns are yet another issue. The majority of CBDCs will be created such that the central banks can track the spending, unlike completely anonymous cash. The increased risk to user privacy must be addressed as well, considering that the central bank would have access to a lot of information about user transactions. This has significant ramifications since digital currency users will not be entitled to the same amount of privacy and anonymity as those who trade with cash.

As the world progresses, technology intervention is leading to the digitisation of services as well as ways of working across industries. We are now at the cusp of entering a new phase of banking, with the digitisation of currency being the first step in this evolution as more innovative payment methods are being developed. Central banks have now started to develop their own digital currencies, also called central bank digital currencies or CBDCs. By the beginning of 2023, India's official digital currency, which would resemble any of the present private company-run electronic wallets, is most likely to be introduced. The CBDC will be a digital currency backed by the government. The digital rupee is a Central Bank Digital Currency to be issued by the RBI and will be backed by the reserves held by the central bank. The digital rupee will be similar to other online or virtual currencies, but it will have some unique features. It will be designed to reduce the cost of printing and circulating currency notes and to promote financial inclusion. The CBDC can benefit consumers over conventional payment methods in terms of liquidity, scalability, adoption, ease of transactions with anonymity, and quicker settlement. With the assistance of the government-provided infrastructure, the adoption of CBDC will grow, enhance and make it simpler for consumers to use. Similar to how UPI made digital cash more user-friendly, this advancement will increase people's access to digital currencies.

Explained Desk (2022): “CBDC, The ‘Digital Rupee’ that RBI could Introduce this year, and How it will Help,” The Indian Express. https://indianexpress.com/article/explained/explained-economics/cbdc-the-digital-rupee-that-rbi-could-introduce-this-year-8105208/

Mehrotra, S (2022): “All you need to know the RBI Central Bank Digital Currency or digital rupee—what is the ‘digital rupee’?,” The Economic Times. https://economictimes.indiatimes.com/wealth/save/all-you-need-to-know-the-rbi-central-bank-digital-currency-or-digital-rupee/budget-hinted-at-a-cashless-economy/slideshow/89408995.cms

ENS Economic Bureau (2021): “RBI for Widening Scope of ‘Bank Note’ to Include Digital Currency,” The Indian Express. https://indianexpress.com/article/business/banking-and-finance/rbi-for-widening-scope-of-bank-note-to-include-digital-currency-7648080/

Times Now (2022): “RBI mulls to launch CBDC this fiscal for wholesale businesses,” Report, TimesNow. https://www.timesnownews.com/business-economy/industry/rbi-mulls-to-launch-digital-currency-cbdc-this-fiscal-for-wholesale-businesses-report-article-93711452

Reserve Bank of India (2022): “RBI Annual Report 2021-22,” Reserve Bank of India. https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0RBIAR2021226AD1119FF6674A13865C988DF70B4E1A.PDF

World Bank Group (2022): “FSI Insights on Policy Implementation No 41 Central bank Digital Currencies: A New tool in the Financial Inclusion Toolkit?,” World Bank. https://www.bis.org/fsi/publ/insights41.pdf

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Cryptocurrency in India: Embracing the Digital Future of Economic Transactions

Cryptocurrency is decentralized digital money that is based on blockchain technology and secured by cryptography. To understand cryptocurrency, we need to understand three basic terminologies – blockchain, decentralization, and cryptography.

In simple words, A blockchain is a distributed database that is shared among the nodes of a computer network. A blockchain stores information electronically in a digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions.

Centralized money refers to regular money, which is governed by authorities like the Reserve Bank of India. Decentralization in cryptocurrency means there is no similar authority that can be held responsible for supervising the rise and fall of a particular cryptocurrency.

Cryptography is the method that secures data from unauthorized access by the use of encryption techniques.

How Does Cryptocurrency Work?

Cryptocurrency can be generated from mining, buying, storing, selling, and also from investing.

Cryptocurrencies are generated through a process called “mining.” Users today can buy cryptocurrencies from central exchanges, brokers, and individual currency owners or sell them to them. Cryptocurrencies like Bitcoins can be easily transferred from one digital wallet to another using only a smartphone.

Many governments worldwide are focused on digital currencies and transactions these days. Even some people do not want their money and transactions to be regulated. This resulted in more innovation in a new currency, cryptocurrency, one of the most sophisticated, ambiguous, and regulation-free currencies.

Some also claim that cryptocurrencies eliminate the need for middlemen such as banks, it would have a detrimental influence on the global economy, particularly in underdeveloped countries.

There are many advantages in dealing with cryptocurrencies. They are private and secure. They are decentralized, immutable, and transparent. They are a hedge against inflation.

Disadvantages include that they are prone to risks, not widely understood, and legality.

Cryptocurrency in India

Until the 2022 Union Budget announcement, the fate of cryptocurrency in India was largely undecided. In the Budget, the Indian Finance Minister’s announcement on levying a 30% tax on gains on the transfer of virtual digital assets, which includes cryptocurrency, was initially seen as an endorsement of cryptocurrencies. There have also been speculations that a ban on private cryptocurrencies would follow the launch of the RBI’s own official digital currency.

Impact of cryptocurrency on the Indian economy

Cryptocurrency enhances transparency, where every transaction can be traced back to the source.

The crypto industry currently employs about 50,000 individuals. As per a report, the industry is poised to see massive employment opportunities, pegged at over 800,000 by 2030. India already has a strong talent pool of Fintech professionals and IT experts. Additionally, the talent is available at cost-effective rates.

As mentioned earlier, India already has a strong base of IT professionals. The collaboration of IT and the financial sector can bring endless possibilities in terms of business opportunities and overseas cash influx.

Cryptocurrency transactions are both time and cost-effective. The transactions are carried out between the sender and receiver without the need for a third party, making the transactions instantaneous. With the government proposing the creation of a single, officially recognized cryptocurrency, the dependence on third-party, private, and foreign-based cryptocurrency will be eliminated.

The cryptocurrency market cannot be ignored, and the possibilities are endless. India has one of the highest numbers of crypto users. Even the government has acknowledged the potential of cryptocurrency as a means of payment, thereby proposing a bill to issue and regulate RBI-backed cryptocurrency in the country. In the future, we can see cryptocurrency becoming the primary player fueling the country’s economy.

• Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System.
• Tapscott, D., & Tapscott, A. (2016). Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World. Penguin.
• Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and Cryptocurrency Technologies. Princeton University Press.
• RBI publications and circulars related to cryptocurrency and digital currency.
• Government of India. (2022). Union Budget Speech.
• Zohar, A. (2015). Bitcoin: under the hood. Communications of the ACM, 58(9), 104–113.
• Casey, M. J., & Vigna, P. (2018). The Truth Machine: The Blockchain and the Future of Everything. St. Martin’s Press.

Cite this page

Cryptocurrency in India: Embracing the Digital Future of Economic Transactions. (2023, Aug 30). Retrieved from https://edusson.com/examples/cryptocurrency-in-india-embracing-the-digital-future-of-economic-transactions

"Cryptocurrency in India: Embracing the Digital Future of Economic Transactions." Edusson Blog , 30 Aug 2023, https://edusson.com/examples/cryptocurrency-in-india-embracing-the-digital-future-of-economic-transactions

Edusson Blog. (2023). Cryptocurrency in India: Embracing the Digital Future of Economic Transactions . [Online]. Available at: https://edusson.com/examples/cryptocurrency-in-india-embracing-the-digital-future-of-economic-transactions [Accessed: 25 Aug. 2024]

"Cryptocurrency in India: Embracing the Digital Future of Economic Transactions." Edusson Blog, Aug 30, 2023. Accessed August 25, 2024. https://edusson.com/examples/cryptocurrency-in-india-embracing-the-digital-future-of-economic-transactions

"Cryptocurrency in India: Embracing the Digital Future of Economic Transactions," Edusson Blog , 30-Aug-2023. [Online]. Available: https://edusson.com/examples/cryptocurrency-in-india-embracing-the-digital-future-of-economic-transactions . [Accessed: 25-Aug-2024]

Edusson Blog. (2023). Cryptocurrency in India: Embracing the Digital Future of Economic Transactions . [Online]. Available at: https://edusson.com/examples/cryptocurrency-in-india-embracing-the-digital-future-of-economic-transactions [Accessed: 25-Aug-2024]

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Sansad TV Perspective: RBI’s Digital Currency

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam , especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: ‘RBI’s Digital Currency’.

Anchor: Vishal Dahiya

Participants:

• Dr. Ashok K. Nag, Former Advisor, Reserve Bank of India
• Subhomoy Bhattacharjee, Consulting Editor, Business Standard
• Amit Dubey, Digital Technology Expert

The Reserve Bank of India ( RBI ) recently announced the commencement of India’s first Digital Rupee pilot project for specific use cases.

• The use cases for the pilot project also include the settlement of secondary market transactions in government securities and about 9 banks have been recognised for participation in this project. 
• RBI has started India’s first Digital Rupee pilot project in the wholesale segment and believes that the use of the Digital Rupee in the wholesale segment will make the interbank market more efficient and reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or collateral to mitigate settlement risk.
• RBI also aims to launch the first pilot in the Digital Rupee-Retail segment soon in select locations in closed user groups consisting of customers and merchants. 

Central Bank Digital Currency (CBDC) or Digital Rupee

• CBDC is a digital form of currency notes issued by the central bank of India i.e. RBI.
• RBI defines CBDC as the legal tender issued by a central bank in a digital form.
• CBDC in India will be referred to as “Digital Rupee” or “e₹” and it will act as an additional option to the currently available forms of money.
• CBDC is very similar to banknotes but they are in digital form and have several benefits such as being easier, faster and cheaper. 
• Experts say that CBDC or Digital Rupee will have all the advantages that are offered by the cryptocurrency and  at the same time it also addresses most of the concerns associated with cryptocurrencies.

Read more about – Central Bank Digital Currency (CBDC)

The need for CBDCs

• With the changes in the technological shape of the world, the form of currency is also rapidly changing across the world. In this context, central banks across the world have started to believe that digital currencies would be the future.
• The advent of advanced technologies such as blockchain has led to the digitalisation of money and hence it has become essential for the development of Central Bank Digital Currencies to exploit the potential benefits these new-age technologies offer.
• Further, the large-scale mushrooming of private cryptocurrencies in recent years has challenged the fundamental notion of money and the central banks around the world are coming up with their own form of digital currencies which are sovereign and thereby mitigate the risks associated with private cryptocurrencies.

Different types of CBDC

CBDC or the Digital Rupee is categorised into two types namely Retail (CBDC-R) and Wholesale (CBDC-W).

• CBDC-R will be potentially available for all users.
• CBDC-R provides access to safe money for payment and settlement as it is a direct liability of the central bank.
• CBDC-W can be used for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market.
• CBDC-W has the potential to transform settlement systems for financial transactions and make them more efficient and secure.

Technology involved

• Since CBDCs are digital in nature, technological considerations have remained at the core.
• The key technology behind the CBDC is blockchain technology which is a distributed ledger-based technology but it is in a centralised form.
• The underlying principle behind the centralised form is to ensure cybersecurity, technical stability, resilience and sound technical governance standards.

Significance of the pilot project launched by RBI

• The launch of the Digital Rupee is seen to be a landmark moment in the history of currency as it is expected to revolutionise the way business is being undertaken and transactions are conducted.
• The pilot project in the wholesale segment will also play a crucial role as a confidence-building mechanism to show all the stakeholders that the Digital Rupee is working exactly the way it was anticipated before being introduced in the retail segment or in a full-fledged manner. 
• Further, the pilot project will help RBI iron out all aspects of CBDC before the full-fledged launch.

Recommendations

• RBI must analyse and learn from various experiences; experiments were undertaken across the world and global best practices which include e-krona of Sweden as they help in the reduction of various infrastructure costs.
• RBI also must ensure that the Digital Rupee mimics the role played by the paper currency which can be transferred in a wallet-to-wallet form without the need for a bank account.
• RBI must also work towards addressing the prevailing trust issues on digital currencies amongst the public which includes the fear of cybercrimes, cyber frauds and money laundering.
• Further, with CBDCs across the world still in the conceptual, nascent, or pilot stages, there is a lack of precedence. Thus there is a need for extensive stakeholder consultation along with iterative technology design to develop a platform that meets the demands.

Conclusion 

The Digital Rupee or the CBDC of RBI is promising various benefits which include ensuring transparency and low cost of operation. However, elaborate planning and monitoring with respect to scope, cost, and timelines hold the key to ensuring the effective introduction and implementation of CBDC.

Read all the previous Sansad TV Perspective articles in the link.

Sansad TV Perspective: RBI’s Digital Currency :- Download PDF Here

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DIGITAL PAYMENTS AND THEIR IMPACT ON THE INDIAN ECONOMY

Recent case studies.

India has a huge potential for digital payments. As of October 2021, the country had around 1.18 billion mobile connections, 700 million Internet users, and about 600 million smartphones. These numbers are growing rapidly each quarter. With about 25.5 billion real-time payment transactions, India ranked first in the world in terms of the number of transactions in 2020.

In 1996, Industrial Credit and Investment Corporation of India (ICICI) introduced online banking services in India, by using electronic banking at its branches. Later in 1999, banks such as HDFC, IndusInd, and Citi launched online banking facilities. The trend continued to grow with increasingly more banks launching net banking services in India. This marked the beginning of the digital transactions era in India – several new banks started offering services to users.

In 2008, the National Payments Corporation of India (NPCI) started its journey. It was formed by the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) in order to create a robust payment and settlement infrastructure in India. Since then, it has launched several products such as Aadhaar Enabled Payments System, Bharat Bill Payments System (BBPS), BHIM, and Cheque Transaction System.

• Banking Card – This was launched by the Central Bank of India in India in 1980, in the form of the first credit card. MasterCard was introduced in 1988, and until 1993, several PSU banks started issuing credit cards.
• Unstructured Supplementary Service Data (USSD) – The USSD functionality was launched in 2016. This is a mobile banking facility enabling users to use mobile banking without smartphones or an Internet connection.
• Aadhaar Enabled Payment Systems (AEPS) – This is a bank-led model which allows online interoperable financial inclusion transactions at point-of-sale (PoS) through the business correspondent of any bank using the Aadhaar authentication.
• Unified Payments Interface (UPI) – UPI was developed by NPCI in 2016; it facilitates peer-to-peer, person-to-merchant transactions.
• Mobile Wallet – This is a virtual wallet that stores payment card information on a mobile device.
• Bank Pre-Paid Card – Under the motto “Pay Now, Use Later,” the pre-paid cards allow users to buy things with funds available in their cards.
• Point of Sale – Point of Sale (PoS) is a technological instrument provided by a Merchant Establishment (ME) to carry out the sale of goods or services to customers in a cashless environment.
• Internet Banking – This is an online banking method that enables customers of a bank or financial institution to carry out transactions through a portal.
• Mobile Banking – This is a service provided by banks and financial institutions to carry out financial transactions through a mobile device.
• Micro ATM – These are portable devices allowing banking transactions through card swipe machines.

In order to transform India into a digitally empowered society and knowledge economy, the Government of India launched Digital India programme in 2015. The programme focuses on three main vision areas: digital infrastructure as a core utility to every citizen, governance and services on demand, and digital empowerment of citizens. Through the programme, the government wants to ensure the availability of high-speed Internet, provide mobile phones and bank accounts to every citizen, ensure availability of services in real-time from online and mobile platforms, make financial transactions electronic and cashless, and ensure digital literacy and availability of digital resources across the country.

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Central Bank Digital Currency

• 30 Nov 2021
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Why in News

Recently, the Reserve Bank of India (RBI) has proposed amendments to the Reserve Bank of India Act, 1934 , which would enable it to launch a Central Bank Digital Currency (CBDC) , thus enhancing the scope of the definition of ‘bank note’ to include currency in digital form.

• The move has come amid the government’s plans to introduce a Bill on cryptocurrencies in the current Parliament session that seeks to prohibit all private cryptocurrencies in India with certain exceptions.
• Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed.
• Though the concept of CBDCs was directly inspired by bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
• By regulating digital currency, the central bank can put a check on their malpractices.
• As the cryptocurrencies are not pegged to any asset or currency, its value is solely determined by speculation (demand and supply).
• Due to this, there has been huge volatility in the value of cryptocurrencies like bitcoin.
• Today, a sovereign Digital Rupee isn’t just a matter of financial innovation but a need to push back against the inevitable proxy war which threatens our national and financial security.
• Digital Rupee provides an opportunity for India to establish the dominance of Digital Rupee as a superior currency for trade with its strategic partners, thereby reducing dependency on the dollar.
• If these private currencies gain recognition, national currencies with limited convertibility are likely to come under some kind of threat.
• It would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
• India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC to the extent large cash usage can be replaced by (CBDC), the cost of printing, transporting and storing paper currency can be substantially reduced.
• It will also minimize the damage to the public from the usage of private virtual currencies.
• It will enable the user to conduct both domestic and cross border transactions which do not require a third party or a bank.
• It has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk.
• It would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.
• Some key issues under RBI's examination include, the scope of CBDCs, the underlying technology, the validation mechanism and distribution architecture.
• Also, legal changes would be necessary as the current provisions have been made keeping in mind currency in a physical form under the Reserve Bank of India Act.
• Consequential amendments would also be required in the Coinage Act, Foreign Exchange Management Act (FEMA) and Information Technology Act .
• Sudden flight of money from a bank under stress is another point of concern.
• El Salvador, a small coastal country in Central America, has become the first in the world to adopt Bitcoin, as legal tender.
• Britain is also exploring the possibility of creating a Central Bank Digital Currency (Britcoin).
• In 2020, China started testing its official digital currency which is unofficially called “Digital Currency Electronic Payment, DC/EP”.
• In April 2018, RBI banned banks and other regulated entities from supporting crypto transactions after digital currencies were used for frauds. In March 2020, the Supreme Court struck down the ban as unconstitutional.

Way Forward

• The creation of a Digital Rupee will provide an opportunity for India to empower its citizens and enable them to use it freely in our ever-expanding digital economy and break free from an outdated banking system.
• Looking into its impact on macroeconomy and liquidity, banking systems and money markets, it is imperative of policymakers to thoroughly consider the prospects of Digital Rupee in India.