Though central banks around the world vehemently oppose cryptos, they have also realised that digital currency is the future. RBI has unveiled its own version of cryptocurrency and it is the first step in this direction.
The RBI recently launched the Central Bank Digital Currency (CBDC) or e₹. This is a digital form of currency note issued by the central bank, akin to sovereign currency and exchangeable at par with the fiat currency. CBDC can be classified into two broad types – general purpose or retail (CBDC-R) and wholesale (CBDC-W). Retail CBDC is an electronic version of cash, primarily meant for retail transactions. Wholesale CBDC is designed for select financial institutions, that perform interbank transfers and other wholesale transactions. The central bank has identified eight banks for the phase-wise pilot launch of the retail digital rupee. State Bank of India (SBI), ICICI Bank, YES Bank and IDFC First Bank are taking part in the first phase. Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join the pilot in the second phase.
Not like UPI, NEFT or Wallets…
These digital currencies are different from existing electronic mediums like UPI, NEFT, Mobile wallets. The current digital transactions are linked to bank accounts and any transactions done is recorded in the account statement. On the other hand, e₹ are basically tokens like cash but in digital form, which can be bought from the participating banks and stored in the wallet. Apart from being used for transaction, the tokens are also a store of value like physical cash. These ultimately reduce the need for physical cash and also the related hassles of printing, storing and transporting them.
Same as crypto, yet different
The CBDCs is just like any other crypto currency, except that it is backed by the central bank. Similar to bitcoin, Ethereum, e₹ also uses blockchain technology. The differentiating factor is that private crypto coins are mined by solving difficult algorithms and as such have no intrinsic value. CBDCs shall be made available by the RBI and is just like fiat money in the economy. The private crypto currencies are geared to bypass the existing financial controls, but this digital currency is regulated and within the ambit of financial policies, at the same time, it also assures anonymity similar to using cash.
Challenges ahead
The existing crypto currency environment poses serious threats to the monetary system. Addressing this, many countries have started to work on their own digital currency. But there are challenges. To begin with, recently the bitcoin system was hacked and coins were mined, that were later invalidated. This highlights that the system is vulnerable and can be fiddled with. It applies to the digital currency issued by the central banks as well.
For a country like India, where digitalisation has a long way to go, it’ll take time for people to accustom to this. Digital currency is the future. It has been the long-awaited solution to curb black money. The pilot project is now open only to limited users, we will have to wait for the results. Nonetheless, it is definitely a first good step in the right direction!
