Introduction:

On 1^st February, 2022, in its Union Budget which was placed in the Parliament, Government of India announced its launch of the Digital Rupee (a Central Bank Digital Currency (CBDC)) from 2022-23. It was announced that introduction of CBDC will be a big boost for the digital economy. It was also stated that the introduction of CBDC using blockchain and other technologies will make currency management system cheaper and more efficient. 

Accordingly, on 30^th March, 2022, the Government of India in its gazette notification notified the necessary amendments in the Reserve Bank of India (RBI) Acct, 1934. This enabled the RBI for running the pilot and subsequent issuance of CBDC.

What is CBDC?

RBI defines CBDC as a legal tender (i.e. money) issued by the central bank in Digital form. This has same sovereignty as the normal currency but in digital form.

This is exchangeable at par with the fiat currency. One of the main difference between CBDC and other digital form (which are prevailing in India), is CBDC would be direct liability of RBI and not any commercial bank.

Features of CBDC

• • An autonomous currency issued directly by Central Banks in alignment with their Monetary Policy.
  • This will appear as a liability in Central Bank’s balance sheet and not in any  Commercial Bank’s
  • CBDC is a legal tender which must be accepted as medium of payment and a safe store of value by all citizens, enterprises and government agencies.
  • CBDC can be freely convertible against commercial bank money and cash.
  • CBDC is a Fungible (essentially interchangeable legal tender) need not have a bank account.
  • CBDC may lower the cost of transactions and issuance of money.

Advantages of CBDC

The basic advantages of CBDC compared to other digital payments are

1. 1. Liquidity in Digital Form: – CBDC is a liquidity in digital form. Its more or less like a cash (or any form of money) which you are just paying (or giving) for the goods and services you receive from the sellers.
   2. Integrity: – Since it is directly issued by the Central Bank, the integrity cannot be ever questioned.
   3. Settlement Finality/ Confirmation: – Like any digital payments made even in CBDC settlements can be confirmed easily. The only difference here is there is no intermediation from commercial banks (or) say intermediation of commercial banks (where the account holder has their account). Here central bank debits the account of the payer as well as it credits the account of the payee. Once this transaction is made it is irreversible.
   4. Easy to carry: – Like any other digital payments this is also easy to carry as the liquidity is in the form of cash.
   5. Smooth Payment System: – CBDC woks smoothly. As this is provided by the central bank there is no delay on settlement or payments.

Types of CBDC

There are two types of CBDC and they are classified on the basis of usage and the functions considering their different levels of accessibility. The two types of CBDC are

1. 1. CBDC Retail – CBDC -R): – Basically this is for general purpose. This is restricted for financial institutions. This is available for use by all private sector, non-financial consumers and businesses. To achieve the objective of financial inclusion central bank can always consider in issuing CBDC-R.
   2. Wholesale CBDC (CBDC-W): – This designed for restricted access to financial institutions and also can be used for interbank payments or securities settlement. This is expected to increase the efficiency of interbank payments or securities settlement (example – Project Jasper, Canada and Ubin, Singapore).

Differences between CBDC and Other Digital Currency (UPI)