Written by Deepanshu Bhandari - A Lead Anchor and Head of Research at Zee Business. He has over 15 years of experience in the financial markets tracking macro and micro factors of the Indian economy. The RBI rolled out Digital Rupee or Central Bank Digital Currency (CBDC) earlier this month, making India amongst a handful of nations globally to have its own Virtual Currency. Touted as the next big step in India's digital transformation, the economy could potentially reap rich rewards by adopting this new payment infrastructure.
How does it work?
Think of the physical money you carry in your wallet. CBDC is the digital version of that. All currency in India is issued by the RBI and Digital Rupee is no exception. It is a centralised and regulated virtual currency, completely legal and recognised by the Government of India. The value of Digital and physical Rupee is the same. Two versions of Digital Rupee will exist - one for retail use (CBDC-R) and another for wholesale (CBDC-W). Retail CBDC can be used by all of us for daily use, just like physical currency. Wholesale CBDC will be restricted to financial institutions for interbank transfers and wholesale transactions.
It is not Crypto
While the underlying block-chain technology maybe the same, Digital Rupee is not a crypto currency. Digital Rupee is centralised and issued by the RBI. There is only one issuer - The Reserve Bank of India. It cannot be mined like other crypto-currencies. It is a legal tender, at par with your regular fiat currency.
Ease of Use
Digital Rupee takes no physical form. This makes transfers and settlements easier and more efficient. Every unit of CBDC is uniquely identifiable and traceable. All transaction are recorded on the blockchain and its every movement can be tracked. In future programmable options can be added to the CBDC to make it more efficient. Ultimately Digital Rupee will lead to more transparency in financial markets.
Bank frauds are common in India. Thousands of crores are lost to fraud every year. While banks and lenders do heavy due diligence while giving out loans, there is no way to track the end use of proceeds. This is where Digital Currency turns the game on its head. Since every transaction is recorded on the blockchain, it is easy to monitor how the money is being used. Traceability will be a big boon to end frauds.
Ultimately it all boils down to the cost. Digital Rupee is expected to significantly drive down transaction costs. Since payments are entirely on the digital infrastructure, it negates the need for separate collateral to mitigate settlement risks for banks. It also significantly drives down money printing costs for RBI, estimated to be in the range of 5,000 crores annually. For users too, there is no hassle of storage and currency rotation since digital rupee cannot be physically damaged.
Early signs encouraging
Its been over 10 days since its launch and early adoption signs are encouraging. On the first day interbank transactions with Digital Rupee totaled 275 crores. Since then, transactions worth over 500 cr, primarily in Government securities, are being witnessed daily by using Digital Rupee. This is an encouraging sign that shows market is ready for wide rollout for this concept.
It will not earn interest
Think of Digital Rupee as the virtual equivalent of having money in your wallet. The money in your wallet does not earn you any interest income, unlike money kept in a bank account. Similarly, holding Digital Rupee will not earn you any interest on it.
Several other key issues still need to be addressed before nationwide rollout of the CBDC project. We still need to know whether retail use will be via token system or something else. Can Digital Rupee be stored in a bank account, similar to what we have now? How will Digital Rupee transactions work offline? Will there be a dispute redressal framework in case of failed Digital Payments? Do you need a smartphone for using CBDC?
While we await clarity on the future of this project, for now it seems the RBI has made a solid first step in converting the money in your wallet into its digital avatar. We now await the future direction on the CBDC. You can catch Deepanshu Bhandari live on air daily between 8-11 AM and 2-3.30 PM on Zee Business. Do follow him on social media for insightful updates - Twitter: @deepdbhandari IG: @Bhandari.Deepanshu