India’s Central Bank Digital Currency (CBDC), the digital rupee, is coming soon.

As announced in the Union Budget earlier this year by Finance Minister Nirmala Sitharaman, the digital rupee is all set for a pilot launch by the Reserve Bank of India (RBI).

The central bank has also released a concept note on the CBDC as it aims to create awareness about what would be accomplished with the digital rupee.

As per the RBI, the digital rupee will be a complement to the existing forms of money, and while it won’t be different from banknotes, it would usher in the ease of transaction by being cheaper and faster.

The concept paper, meanwhile, focuses on technology, design choices, potential use cases, issuance mechanisms, monetary policy, and individual privacy.

CBDC, quite like banknotes but digital, will be a legal tender issued by the central bank and could be exchanged for existing currency forms. 

CBDCs are different from cryptocurrencies, for they have the backing of the central bank, and have a stable value (equivalent to the national currency). 

The settlement and liquidity aspects are taken care of, unlike the crypto exchanges.

RBI’s Deputy Governor T Rabi Sankar in an interview recently stated that the digital rupee will leave no room for private cryptocurrencies to exist.

Given the CBDC would allow governments to track financial transactions better than today, the existence of an unregulated crypto market would contradict the existence of the former altogether. 

The digital currency rollout across China, the United States, and other big markets across the world including India, the United Kingdom, and Japan, would directly threaten the existence of the cryptocurrency market, already hammered by the recent meltdown. 

A discussion paper by the Bank of England, from March 2020, offers insights into the possibilities associated with the central banks going digital and what India could achieve. 

This would include supporting a resilient payments landscape, meeting future payment needs in a digital economy, improving the availability and usability of central bank money, addressing the consequences of a decline in cash, and most importantly, as a building block for better cross-border payments. 

The rise of digital currency, backed by the central bank, could give rise to ‘programmable money’ with monetary policy catering to certain businesses or sectors.

This would allow for enabling transactions for only certain events, under specified rules, or for specific regions.

However, in the long term, RBI would be looking at a phased approach to launch the digital rupee, covering several use cases at a time.