Will RBI's digital currency give a fillip to fintech sector?

Prime Minister Narendra Modi on Wednesday said that India’s Central Bank Digital Currency or CBDC will revolutionise the fintech sector by creating new opportunities and lessen the burden in handling, printing and logistics management of cash, apart from making digital payments and online transfer of funds more secure.

 A currency is a currency only when it is issued by the central bank, even if it is a crypto. Anything outside of that, loosely we refer to them as cryptocurrencies, are not currencies: Finance Minister Nirmala Sitharaman.

 A day after announcing the launch of digital rupee in the Union Budget, Finance Minister Nirmala Sitharaman told a press conference that (Read the quote).

RBI governor Shaktikanta Das has already shared his strong views against the private digital currency which is decentralised and can be issued by anyone.     

In her budget speech, the finance minister said that the digital rupee will be launched using blockchain and other technologies. But a financial daily, quoting some senior officials, said that the RBI may consider other “centralised” technology models apart from blockchain to host its proposed digital currency.

So the exact regulations governing India's digital currency are yet to be finalised. But before looking at the possible use cases of a CBDC, let us understand how it works. 

More From This Section

Data price hikes limited Facebook user growth in India, says Meta

Want to retract part of deposition made before probe panel: Waze

Foreign ministers of Quad countries likely to meet in Melbourne this month

Will defend reservation law strongly: Haryana CM Manohar Lal Khattar

While the government treats private cryptocurrency as an asset, a CBDC is a legal tender issued by a central bank in a digital form. Issued by the RBI, it will be fungible with physical currency. It is sovereign currency in an electronic form and would appear as a liability on the central bank’s balance sheet, just like the banknotes in circulation. 

The two major categories of CBDCs are wholesale and retail. Wholesale CBDC is designed for use among financial intermediaries, such as between the central bank and commercial banks.

While, retail CBDC is meant for the general public. This type of digital currency can be based on blockchain or distributed ledger technology that can validate transactions. For example, China’s central bank currency, the digital yuan, does not use blockchain. 

Retail CBDC can be issued directly by the RBI to the public or through commercial banks. 

Economic Affairs Secretary Ajay Seth has said the RBI would be issuing both wholesale and retail digital rupee. He also raised the possibility of deploying smart contracts using CDBC. Smart contracts are programs on blockchain that automatically execute decisions when predetermined conditions are met.

In a speech last year, RBI Deputy Governor T Rabi Sankar listed out the advantages that CBDCs have over other digital payments systems. 

He said that payments using CBDCs are final and thus reduce settlement risk in the financial system. The need for interbank settlement is eliminated if digital rupee is transacted on a UPI-like system, Sankar added. CBDCs would also potentially enable a more cost-effective globalisation of payment systems. An Indian importer could pay an American exporter on a real-time basis without the need for an intermediary. The time zone difference would no longer matter in currency settlements.

90 countries representing 90% of the global GDP are currently exploring digital currencies. Of these, 16 countries are now in the pilot stage while nine countries have launched a digital currency. India will soon join this small group of countries with a digital currency.

Watch video