Central Bank Digital Currency

Central Bank Digital Currency (CBDC): Impact on Indian Financial System & Cryptocurrency

Among the key announcements that Finance Minister Nirmala Sitharaman announced in her Budget 2022 speech, one was about the Reserve Bank of India (RBI) launching its own Digital Rupee in financial year 2022-23. Digital Rupee is a Central Bank Digital Currency (CBDC) issued by the Government of India. FM elaborated how Central Bank Digital Currency would provide a significant boost to India’s digital economy. To introduce Digital Rupee, Reserve Bank of India (RBI) has proposed amendments to the Reserve Bank of India Act 1934, which will enable the RBI to launch Central Bank Digital Currency (CBDC). Soon the Indian Digital currency launch date will also be announced.

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The Central Bank Digital Currency India will enhance the scope of the definition of ‘bank note’ to include currency in digital form also. This development has come amid the government’s plans to introduce a Bill on Cryptocurrencies in Parliament soon.  Experts while analysing the Central Bank Digital Currency and The Future of Monetary Policy, are of the view that the Digital Currency in India (CBDC) will have a significant impact long term on the banking and financial system in India.

Given the importance, the RBI launch of Central Bank Digital Currency in India  becomes an important GD Topic  2022 for MBA Admissions. Let’s understand the key points and be ready to effectively discuss this GD Topic on RBI to issue Central Bank Digital Currency in India 

What is a Cryptocurrency? Is Cryptocurrency in India legal?
Let’s start by first understanding what a Cryptocurrency is. Well, cryptocurrency is a medium of exchange, such as the US dollar or Indian rupee, but is digital in format. Cryptocurrency uses encryption techniques to both control the creation of monetary units and to verify the exchange of money. Bitcoin is generally regarded as the world’s largest cryptocurrency in the world, followed by Ethereum.

What is Central Bank Digital Currency in India (CBDC)?
CBDC, also known as National Digital Currency in India, is a digital form of Government backed ‘Fiat Currency’ which can be transacted using wallets backed by blockchain and is regulated by the central bank. It is a ‘legal tender’ issued by a central bank in a digital form.So, instead of printing paper currency or minting coins, the Central Bank issues electronic tokens. This token value is backed by the full faith and credit of the government.

Though the concept of Central Bank Digital Currency (CBDCs) was inspired by Bitcoin, it is different from decentralised virtual currencies, which are not issued by the government and lack the ‘legal tender’ status.

Government appointed SC Garg Committee (2019) Recommendations were:

• Ban anybody who mines, hold, transact or deal with cryptocurrencies in any form
• It recommends a jail term of 1 to 10 years for exchange or trading in digital currency.
• It proposed a monetary penalty of up to three times the loss caused to the exchequer or gains made by the cryptocurrency user whichever is higher.
• However, the panel said that the government should keep an open mind on the potential issuance of cryptocurrencies by the Reserve Bank of India.

Why is Digital Currency in India Needed?
There are many reasons for introducing digital currency in India, such as:

1. Checking Malpractices: The need for a sovereign digital currency arises from the anarchic design of existing Cryptocurrencies, wherein their creation, as well as maintenance, are in the hands of the general public. By regulating digital currency in India directly, the central bank can put a check on their malpractices.
2. Addressing Volatility: As the cryptocurrencies are not pegged to any asset or currency, its value is solely determined by speculation (demand and supply). Due to this, there has been huge volatility in the value of cryptocurrencies like bitcoin. CBDCs are expected to be more stable.
3. Check Digital Currency Proxy War: India runs the risk of being caught up in the whirlwind of a proxy digital currency war as the US and China fight to gain supremacy. A sovereign Digital Rupee is a need to push back against the proxy war which can threaten our national and financial security.
4. Reducing Dollar Dependency: Digital Rupee provides an opportunity for India to establish the dominance of Digital Rupee as a superior currency for trade with its strategic partners, thereby reducing dependency on the dollar.
5. Reduce Currency Cost: CBDC can reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
6. Reduce dependence on Cash: India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC to the extent large cash usage can be replaced by (CBDC), the cost of printing, transporting and storing paper currency can be substantially reduced.
7. Ease of usage in cross border transactions: CBDC will enable the user to conduct both domestic and cross border transactions which do not require a third party or a bank.

So CBDC has the potential to provide significant benefits.

Concerns & Issues:
However financial experts point out to some concerns too.

• Some key issues include the scope of CBDCs, underlying technology, validation mechanism,  distribution architecture and the mechanism how to invest in central bank digital currency
• Also, legal changes would be necessary as the current provisions have been made keeping in mind currency in a physical form.
• Consequential amendments would also be required in the Coinage Act, Foreign Exchange Management Act (FEMA) and Information Technology Act.
• Potential cyber security threat cannot be ruled out
• Introduction of digital currency in India also creates various associated challenges in regulation, tracking investment and purchase, taxing individuals, etc.
• The digital currency must collect certain basic information of an individual so that the person can prove that he’s the holder of that digital currency and has rightfully invested in Central Bank Digital Currency.

Way Forward

The creation of a Digital Rupee will provide an opportunity for India to empower its citizens and enable them to use it freely in our ever-expanding digital economy. However, looking into its vast impact on banking systems and money markets, it is imperative that policymakers keep thorough due diligence and put necessary checks and balances for smooth roll out of Digital Rupee in India.
 

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