What is Digital Rupee? Everything Explained About India’s Digital Currency (CBDC)

Feb. 3, 2022

In this explainer, we have discussed what is Digital Rupee, CBDC, how it is different from other cryptocurrencies, and more. You can use the table below to get answers to your queries at your convenience.

Before we understand Digital Rupee, we must know what CBDC is. CBDC stands for Central Bank Digital Currencies, and the term is being used all over the world. It’s essentially acurrency in electronic form, issued by the Central bank of the country. For example – RBI is the Central bank of India, so RBI has the authority to issue a digital currency that is similar to fiat currency (or paper money) already in circulation.

It’s also important that we understand the concept of fiat currency before moving forward. Fiat currency is a sovereign currency, meaning the country’s Central bank issues it, which, as a result, bringsinherent trust to the currency. It’s not issued against commodities like gold or silver, but the Central bank declares it as a legal tender by the force of law. To sum up, the digital currency (Digital Rupee, as it may be called) will appear as a liability on RBI’s balance sheet. Hence, it will be a legal tender in India.

So when the Indian government states that the RBI is going to introduce Digital Rupee, it means thatDigital Rupee will be a CBDC, the digital version of fiat currency, and it will be exchangeable with cash. Now, if you wonder how it is different from other cryptocurrencies or digital cash that we use through UPI, Net Banking, etc., read on to find out more.

Now, how the RBI is going to implement Digital Rupee and what sort of cryptography it’s going to use is not known right now. We also don’t know if Digital Rupee will be interoperable with othercryptocurrencies such as Bitcoin, Ethereum, etc. That said, we do know that, unlike cryptocurrencies, Digital Rupee will be acentralized digital currency, although it will use Blockchain technology to maintain a secure ledger.

First of all, the foundational difference between Digital Rupee and other cryptocurrencies is that India’s Digital Rupee iscentralized and can be regulated by RBI. Whereas popular cryptocurrencies such as Bitcoin and Ethereum use a decentralized model, which means no single entity has complete control.

There is an issuer (RBI) in Digital Rupee, whereas other cryptocurrencies don’t have an issuer. In fact, with private cryptocurrencies, all the users collectively retain control, and all transactions are available on a public encrypted ledger.

Another difference is that Digital Rupee can establish the trail of money and can find the information behind a transaction (who paid and received the money), bringing much-needed transparency to the monetary system. Whereascryptocurrencies offer anonymitywith their long strings of encrypted numbers and letters. Anonymity is something that governments don’t like, and this is where Digital Rupee fills the shoe. As for how efficient India’s Digital Rupee will be in terms of energy consumption against popular cryptocurrencies, we have no information in this regard yet.

The difference between Digital Rupee and Digital Cash is a bit technical, and itchanges things more on the backendrather than for the people transacting using Digital Rupee. In arecent speech, T Rabi Sankar, the Deputy Governor of RBI, highlighted the difference between Digital Rupee and UPI as follows:

“CBDCs have some clear advantages over other digital payments systems – payments using CBDCs are final and thus reduce settlement risk in the financial system. Imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over – the need for interbank settlement disappears.CBDCs would also potentially enable more real-time and cost-effective globalization of payment systems,”said Sankar.

Moreover, he further added,“It is conceivable for an Indian importer to pay its American exporter on a real-time basis in digital Dollars, without the need of an intermediary. This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement. Time zone difference would no longer matter in currency settlements – there would be no ‘Herstatt’ risk.”

As you can infer from the above statement, Digital Rupee will bemuch more efficient and cheaperthan handling bank balances as it will cut down on intermediaries. The Finance Minister repeated the same point in her Budget speech that Digital Rupee will be an “efficient and cheaper currency management system”. Also, it will spur growth in global payments while wiring money to another country and so on.

The need to build Digital Rupee or a govt-backed Digital Currency is partly because governments all over the world are afraid of new forms of digital currencies (like cryptocurrency) that theycan’t regulate or find the trail of money. Governments are concerned that people can use cryptocurrency to park money for illicit/ terrorist activities or evade taxes on large sums of black money.

In addition, when so much money (cryptocurrency has a market cap of about $2 trillion) is outside the purview of the country’s monetary system, the government would not be in a good position to make correct monetary policies. And since cryptocurrency has become a thing by now, and it is here to stay, the governments can’t really ban it. More so when it’s beingtouted as the next big thingand no country would like to stall innovation or want to be seen as one.

So, to provide a legitimate alternative, the Indian government is basically launching its own digital currency with the backing of the central bank (RBI), hence bringing trust to the whole digital currency ecosystem.

And as we have learned above, digital currency built on Blockchain can be a powerful and effective way to run a country’s monetary system. Unlike paper money, it would be next toimpossible to duplicate or counterfeitDigital Rupee, which is also a big problem with paper money. Also, RBI can manage the currency efficiently and more cheaply.

As I explained above, the benefit of the Digital Rupee over other cryptocurrencies islegitimacy and trust, as it comes directly from the Indian government and the central bank, RBI. If you are transacting and investing in private cryptocurrencies, you are never sure when the government tables a bill that bans or limits them to the point that it becomes a bad investment. With a 30% crypto tax in place for private cryptocurrencies and 1% TDS, the govt has already made its position abundantly clear that it’s not willing to allow private cryptocurrencies to flourish.

The RBI Deputy Governor went as far as to say that “If these VCs (private cryptocurrencies) gain recognition, national currencies with limited convertibility are likely to come under threat“. So to be on the safe side, you should use Digital Rupee in India as a digital currency.

Apart from that, talking about the benefit to users, the transactions using Digital Rupeewill be far more seamless and efficientthan digital cash. Moreover, it will significantly reduce the time and resources required for the settlement between various banks and payment gateways to process a transaction.

We are not sure if Digital Rupee will be issued directly by the RBI or banks, but it is a space we are currently watching very keenly. As we get more details on this, we will update this explainer with new information. Finally, the Finance Minister states that it will also boost the digital economy and drive financial inclusion to the remotest part of India.

On the European side,Sweden has already launched its E-kronadigital currency, and many other countries are in their groundwork phase. The US is also doing a lot of thinking and has kicked off debate on the issuance of its own digital currency.

So far, the Indian government or RBI has not put a consultation paper in public, so we don’t know the nitty-gritty of how Digital Rupee will work. That said, we know thatDigital Rupee will be based on Blockchainand other technologies to enable a secure and incorruptible ledger. Note that it will be a centralized currency, unlike private cryptocurrencies.

From what we know so far, CBDCs like Digital Rupee may render traditional banks redundant if the RBI chooses to issue Digital Currency by itself. People will no longer put their money in banks, and that will reduce deposits in banks, making it harder for banks to lend money to businesses which will hinder economic growth. But at this point, we don’t have much information, and we have to wait for the fine print. Apart from that, cyber-attacks are one of the biggest risks with electronic fiat, be it a digital currency or digital cash.

No,30% crypto tax will not apply to Digital Rupee in India. The 30% tax is only applicable to private cryptocurrencies like Bitcoin, Ethereum, etc.

As Digital Rupee will be issued by RBI, the sovereign bank to issue a legal tender in India, it’scompletely safe to use. You can trust the central bank that your money is not going anywhere. But we need to see how RBI implements its digital currency in terms of security.

So, it’s possible that it will become an undesirable way to invest and transact in the future. For your information, India currently holds over Rs. 6 lakh crore in crypto assets, so a ban is highly unlikely. Read aboutwhether it is legal to buy and sell Bitcoin or other cryptocurrencies in India or notvia the linked article.

Does India’s Digital Rupee Have a Promise?

So that was all about the Digital Rupee and what RBI’s upcoming CBDC entails. In my opinion, India is currently in a wait-and-watch mode where it does not want to outrightly ban new technologies, but at the same time, want to see what kind of future the technology promises. If you want to know if the government made the right decision by announcing the Digital Rupee? Well, this is a step in the right direction, and the government has done well to announce its own digital currency.

This will motivate people to trust and use digital currency, and with the 30% tax on private cryptocurrencies, the government has made its position clear: we won’t be banning other popular cryptocurrencies, but if you want to use a digital currency, use the Digital Rupee Anyway, that is all from us. If you want tolearn about NFTin detail, follow our linked explainer. And if you have any questions in mind, let us know in the comments section below.

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