Imagine a digital wallet holding money issued directly by the RBI, just like cash in your pocket. Central banks are moving towards creating Central Bank Digital Currencies (CBDCs). Money itself has come a long way, from the barter system to metal coins, paper notes, bank cards, and now digital currency.
Over the last decade, India has positioned itself as a global leader, especially with the launch of Unified Payment Interface (UPI), in promoting digital payments and now accounts for 49% of the global real-time digital transactions.
What are Central Bank Digital Currencies (CBDCs)?
A CBDC is a digital currency issued by a country’s central bank to complement, rather than replace, cash. Unlike cryptocurrencies like Bitcoin, CBDCs are regulated by the government and aim to combine the convenience of digital payments with the stability of traditional money.
India’s CBDC, known as the Digital Rupee (e₹), is a sovereign currency issued by the Reserve Bank of India (RBI) that offers the advantages of trust, liquidity, and integrity. The concept of decentralised digital currency emerged in 2009, with the introduction of Bitcoin, which remains one of the most well-known forms of digital currency.
How Digital Rupee Differs from UPI
UPI and CBDC both enable financial movements but work differently. UPI is a real-time payment system that instantly transfers money between bank accounts, while CBDC is a digital version of the national currency that is issued by the Central Bank. For individuals, this could mean quicker payments, lower costs, and less dependence on banks. Concurrently, added transparency may raise concerns about personal financial privacy.
Benefits
– Streamlines payment processes and reduces the need for intermediaries.
– Reduces counterfeiting and mitigates the risk of money laundering through real-time tracking, audit trails, and centralised oversight.
– Expands financial access for the underbanked through digital currency.
– Creates traceable money trails, preventing black money and tax evasion.
Limitation
– Threat to privacy due to financial activity monitoring.
– Risk to cross-border transactions if international interoperability is without strong regulations.
– Require heavy investment in tech, infrastructure, and regulation.
– Reduce bank deposits, liquidity, and lending capacity.
Global Context
Around the world, countries are experimenting with CBDCs at varying scales. India’s Digital Rupee pilots are moving cautiously, with limited rollout in retail and wholesale use. This measured approach allows India to learn from global successes and mistakes, which will balance innovation with the need for stronger regulations and an anti-money laundering framework.
The Bahamas’ Sand Dollar, which is the first fully launched CBDC, faces slow adoption due to infrastructure and awareness. International bodies like the FATF focus that CBDC must meet AML and CFT standards to protect against cross-border terrorism financing.
Conclusion
India’s effort to introduce CBDC could be a monetary innovation. However, to realise its full potential, it necessitates focusing on the critical challenges. For successful implementation, it is crucial to get the support of individuals to believe and know that the transactions are secure and confidential. CBDCs will unite the safety of central money with the speed and convenience of digital payments. As countries move towards the evolution of such platforms, there will be a global revolution in money.
The question is not about whether there will be CBDC, but how they will coexist with other forms like cash, private bank accounts, and cryptocurrencies.