The Government of India has recently announced the launch of Digital rupee. It was during the month of February, when Finance Minister Nirmala Sitharaman in the Union Budget speech announced that the Reserve Bank of India is planning to launch its own Digital Rupee- a Central Bank Digital Currency (CBDC) with the broad objective to develop a more Efficient and cheaper currency management system.
What is CBDC? Why are countries implementing it?
Central Bank Digital Currencies are basically electronic form of the country’s fiat currency we use for transactions. These are similar to cryptocurrency, but issued by the Central Bank of the respective country therefore making it fully regularized. Advancement in technology and the recent pandemic have a great role to play towards this shift from physical to digital transition. It is not an uncommon practice as many countries are either developing it, like India, or have already launched it, like China.
· Usage of CBDC will make digital transactions easier, especially now when the use of physical form of currency has weakened.
· It also reduces the risk associated with settlement. As mentioned, the broad objective is to develop a more Efficient and cheaper currency management system.
· Usage of CBDC enables a real time payment system even in case of international transactions with difference in time zones.
· One of the reasons why governments across the globe are trying to understand more about this concept is because of the interest people have obtained towards cryptocurrency. Cryptocurrency are highly volatile also very hard to track and regularize, and not backed by any institution, thereby creating a lot of stress and uncertainty regarding its value and use. CBDC will counter it to a great extent.
· It could also push the informal sector into the formal zone by financial inclusion thereby increasing regulatory compliance and better tax collection for the government.
Like any coin with two sides, there are some possible disadvantages and risk associated with the implementation of CBDC which should be researched thoroughly.
· Increased dependency on electronic usage of currency for transactions can cause cyber security risks, thereby leaving many vulnerable. It can also result in data privacy threat. This is one of the most feared operational challenge the Central Bank may face.
· Increased use of CBDC in comparison with physical form of currency means that the government will have all the private data and details regarding all transactions made through it, since digital currency is traceable and regulated.
· Awareness and technical know-how around the usage might take some time. In India, many still depend solely on physical form of money. Adoption to digital fiat may take some time.
· The Central Banks will have to be very adaptive and robust in its management with regular upgradation of technology to ensure smooth functioning. Operational risk management and governance should be properly studied and tested to ensure reliability, scalability and smooth functioning. This can also result in higher operational cost for the Central Bank.
· CBDC demand on a regular basis may vary. Payments made and received though CBDC and non-CBDC holders can cause higher overall volatility.
All in all, I am looking forward to the implementation of Digital Rupee in India. The advantages clearly outweigh the disadvantages. It would be interesting to watch how the Central Bank will plan the launch and handle the uncertainties associated with it.