Budget 2022: What Is Digital Rupee Or CBDC?

Finance Minister Nirmala Sitharaman on Tuesday said that the digital rupee will be introduced by the Reserve Bank of India (RBI) in 2022 to boost the Indian economy while presenting the Union Budget 2022-23. "Introduction of Central Bank Digital Currency (CBDC) will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23,” said Sitharaman.

What is a Digital Rupee or CBDC?

The CBCD is a legal tender issued by a central bank and it is the digital form of the Indian rupee. Since it is the digital form of fiat currency, it is thus, exchangeable one-to-one with the fiat currency. The RBI will launch the CBDC in the upcoming financial year and will be backed by blockchain technology.

What is the use of CBDC?

Like the digital form of payment, the CBCD will bring along with it, several advantages of not having the physical notes. CBDC cannot be torn or physically damaged or lost. The lifeline of a digital form of currency will thus be indefinite as compared to notes. On the other hand, CBDC will also save the government the cost of printing the notes and with digital currencies, it would be accessed more in the remote areas.

Like cryptocurrencies, the CBDC will also be regulated by a central body, mitigating the volatility risk associated with other such digital currencies like Bitcoin. 

Other known facts about CBDC

Following Sithraman’s budget presentation, the RBI will likely detail how the Digital Rupee will be transacted, via a formal announcement. Earlier there have been several models proposed by technology experts and evangelists on how Digital Rupee could be transacted. One chief difference will be that a Digital Rupee transaction will be instantaneous as opposed to the current digital payment experience.

According to several reports, the goal of Digital Rupee is to provide users with convenience and security of digital as well as the regulated, reserve-backed circulation of the traditional banking system.

The demand for CBDC is widespread across countries, however only a few have progressed with it so far.  According to RBI website, “A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. Why this sudden interest? The adoption of CBDC has been justified for the following reasons:-

1. Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency (like Sweden);
2. Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US);
3. Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.”