To give a further impetus and growth to the digital economy, in the recently presented Union Budget 2022-23 speech by the Minister for Finance & Corporate Affairs, Nirmala Sitharaman announced the introduction of Digital Rupee to be issued by the Reserve Bank of India (RBI) starting 2022-23, which will use blockchain and other technologies. The Minister mentioned that in the recent years, digital banking, digital payments and fintech innovations have grown at a rapid pace in the country. Government is continuously encouraging these sectors to ensure that the benefits of digital banking reach every nook and corner of the country in a consumer-friendly manner. Taking forward this agenda, and to mark 75 years of our independence, she announced that it was proposed, in her speech, to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled Commercial Banks.
Globally, the concept of the concept of “Central Bank Digital Currencies” (CBDC) is not a recent development, but it’s only in the past decade that the concept of digital currency has been widely discussed by central banks, economists & governments including the United States, the European Union and China, who have been working seriously towards issuing their own CBDC. In fact, in October 2020, the Bahamas launched the world’s first CBDC.
In India too, in the speech delivered by the RBI Deputy Governor T. Rabi Sankar in July 22, 2021, ,he delved deep into the reasons for introducing a digital rupee and the possible systemic risks posed by such a currency. He defined CBDC as “the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.” CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer). It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form and use of a CBDC can be moulded for specific requirements. CBDCs should be exchangeable at par with cash.
The RBI Deputy Governor explained, while interest in CBDCs is near universal now, very few countries have reached even the pilot stage of launching their CBDCs. 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:-
- Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency (like Sweden);
- Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US);
- 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.
In addition, CBDCs have some clear advantages over other digital payments systems – payments using CBDCs are final and thus reduce settlement risk in the financial system. CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems. 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.
While as a country, India has predominately been a country that prefers using physical cash, but the proliferation of various digital payments options, and the governments push towards the same, has led to the growth in the digital payments space, and the easy options around it, including for financing / loans etc. Currently, India is leading the world in terms of digital innovations. While the gap between the physical payments and digital payments of currency is reducing, there exists a significant gap when the data is compared in this context between the urban and rural areas in the country. The internet penetration, digital infrastructure and most importantly digital literacy particularly among the rural folks, are some of the impediments towards universal acceptance of a digital payment structure. Perhaps a hybrid model, with a limit on the number of CBDC that an individual can use can be a good starting point, for the initiation into the new regime.
Further, the need for and the realisation to have a CBDCs have been accelerated due to the advent of private virtual currencies (VCs). If these VCs gain recognition, national currencies with limited convertibility are likely to come under threat. Developing CBDC could provide the public with uses that any private VC can provide and to that extent might retain public preference for the Rupee. It could also protect the public from the abnormal level of volatility some of these VCs experience. Indeed, this could be the key factor nudging central banks from considering CBDCs as a secure and stable form of digital money, and as mentioned by the finance minister, a step towards this direction.
While these are early days as far as CBDCs in India are concerned, as the framework and regulations for the same remains to be seen. Further, with the introduction of CBDCs the existing regulations under the Reserve Bank of India Act, 1934, Coinage Act, 2011, Information Technology Act, 2000, in on domestic front, and Foreign Exchange Management Act, 1999 and also various Bilateral Investment and Trade Agreements executed between India and other countries will need a relook and amendments in light of changes that will be required to undertaken in light of the foregoing. As also mentioned above, the RBI will need to bring about a sense of balance between the physical currency and digital currency in India in light of the challenged mentioned above. Also, risks pertaining to digital payments need to be addressed and existing framework and infrastructure needs to be made more robust, in order to make case for its preferred usage of digital currency and also make a case for its potential benefits significantly outweighing the negatives.
