What is Digital Rupee, how it works

 

In her speech on the 2022 budget, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would launch its own digital rupee in the new budget year. The Digital Rupee is the central bank that will launch the digital currency (CBDC) in 2022-23, FM said.

Presenting the EU budget for 2022-2023 in parliament, he explained how the introduction of the central bank’s digital currency (CBDC) would give a significant impetus to the digital economy. “Digital money will also lead to a more efficient and cheaper money management system,” he said.

Here’s a look at what the CBDC is and how it works according to the RBI. 

The full form of the CBDC is the digital currency of the central bank, a legal entity issued by the Reserve Bank of India (RBI). “CBDC equals money issued by the central bank, but in a form other than paper (or polymer). It is sovereign money in electronic form and appears to be mandatory in the balance sheet (currency in circulation). Central bank sheet” Basic technology, form and the use of CBDC can be tailored to specific requirements. The CBDC must be exchanged for cash, “says the RBI website. 

What is a currency?

According to the RBI website: “In modern economies, money is a form of money issued exclusively by a sovereign (as the central bank as its agent). It is the responsibility of the issuing central bank (and sovereignty) and the ability of the public holder. Money like a fiat is legal. Money is usually issued in paper (or polymer) form, but the shape of the coin is not their determining character. 

What is required for CBDC?

Although there is widespread interest in the CBDC, only a few countries have been able to move beyond the pilot phase of developing their own CBDCs. According to the RBI website, “A BIS survey conducted in 2021 among central banks found that 86% were actively exploring the potential of the CBDC, 60% were experimenting with technology, and 14% were involved in pilot projects. Why is it so suddenly important? Adoption of the CBDC is justified for the following reasons: –

1. Central banks, confronted with the declining use of paper money, are trying to promote a more acceptable electronic form of money (eg Sweden);
2. Jurisdictions with significant physical use of money that seeks to make spending more efficient (such as Denmark, Germany or Japan, or even the United States);
Central banks are trying to meet public demand for digital currency, which is reflected in the increasing use of private virtual currencies, thus preventing the more damaging consequences of such private currencies.

Advantages of CBDC over other digital payment systems

“Payments through CBDC are the highest, thus reducing the risk of settlement in the financial system. Consider a UPI system where CBDC transactions are made instead of bank balance when money is delivered – demand for interbank settlement will disappear. CBCC could also allow more efficient and real-time It would be conceivable for an Indian importer to pay its US exporter in real time by default in digital dollars, which does not require an intermediary. This transaction will be final because the dollar is delivered, and it is not even necessary for the US Federal Reserve to be open for settlement. The difference in time zone no longer matters in cash settlement – there is no risk of ‘Herstatt’, “says the RBI website.

Here’s a look at what the SBI has to say about the digital rupee proposal, according to a research report issued by the budget bank:

• In the EU budget, the Minister of Finance announced that the digital rupee would implement the RBI in 2022-23 using blockchain and other technologies. The digital rupee or central bank digital currency (CBDC) will provide tremendous support to the digital economy, and India is the first major country to officially introduce its currency in this way.

• The CBDC is an electronic record or digital token in the official currency of the country that performs basic functions such as currency, unit of account, value custodian and deferred payment standard. As of December 2021, the CBDC is examining 87 countries (representing more than 90% of global GDP), while in May 2020, only 35 countries considered the CBDC. Of these, 9 (Bahamas, 7 Eastern Caribbean and Nigeria) now fully launch the digital currency. Nigeria is the newest country to launch the CBDC, e-Naira, the first outside the Caribbean. However, the furthest are the large countries with the 4 largest central banks (USA, Eurozone, Japan and the United Kingdom). There are 14 countries, including China and South Korea, that are already in the pilot phase of their CBDC and are preparing for a possible full launch soon. 

• Compared to current forms of money, CBDC can provide users with benefits in terms of liquidity, scalability, acceptability, ease of anonymity transactions and faster settlement. The adoption of the CBDC will improve and make it easier for people to use the infrared support provided by the government. Advances will make digital money more accessible to people, just as UPI will make it easier to use digital money. We expect the RBI to use the existing infrastructure through the NPCI to speed up the introduction and adoption of the digital rupee into the economy through the QR code system.

• Digital rupees can have many real-world usage scenarios, such as programmable grant payments and the use of financial institutions for faster lending and repayment. In the very near future, we will see a pragmatic shift towards a cashless economy. This will increase government pressure on cashless payments and positively change the banking scenario. With the growing use of digital rupee, things such as cross-border transfers can also be beneficial, which is a viable interoperability environment where faster real-time transfers can occur. In general, transaction costs for government and businesses will decrease. For example, a worker in the UAE receives 50% of his salary as digital money, which allows him to send money to relatives in any other country cheaper and more efficiently. Wiring fees typically amount to 7% of the value of a single transaction, and the World Bank estimates that reducing the fee to 2% would lead to an annual increase in bottom transfers of $ 16 billion.