On RBI’s Central Bank Digital Currency (CBDC) – Digital future

Source: This post on RBI’s Central Bank Digital Currency (CBDC) has been created based on the article “Digital future” published in “Business Standard” on 15^th February 2024.

UPSC Syllabus Topic: GS Paper 3 Science and Technology – Developments and their applications and effects in everyday life.

News: The article discusses the CBDC-R pilot project being run by RBI. It also highlights the improvements being made in the CBDC by RBI and the benefits due to these improvements. Central Bank Digital Currency RBI

A detailed article on Digital Rupee can be read here.

Background:

Reserve Bank of India (RBI) has been issuing the central bank digital currency (CBDC) on a pilot basis since late 2022. Based on blockchain technology, in the retail segment, CBDC-R was launched for a closed group comprising participating customers and merchants.

What is The CBDC-R Pilot?

The CBDC-R pilot currently enables person-to-person and person-to-merchant transactions using digital rupee wallets.

What are some important features of Digital Rupee?

1) The RBI states that CBDC will be an official digital form of sovereign currency. Similar to traditional currency issued by the central bank, CBDC will also be recorded as a liability on the central bank’s balance sheet.

2) This digital currency will be accepted as a legal tender, a medium of payment and a safe store of value for government agencies, businesses and citizens.

3) It is a fungible legal tender, for which individuals will not need a bank account to store.

4) Digital Rupees can be freely exchanged for commercial bank money and cash.

5) Digital Rupee is considered a safe store of value but not insured against inflation. Like physical cash, the purchasing power of the digital rupee diminishes with rising inflation.

What are The Improvements Being made in The CBDC by RBI?

1) Programmability: It will permit users like government agencies to ensure that payments are made for defined benefits. This means that certain built-in rules will impose restrictions on the usage of money.

2) Offline functionality: It will enable transactions in areas with poor or limited internet connectivity.

This could not only increase the adoption of the digital currency but also help attain public policy goals.

What are The Benefits?

1) Desired Spending: The government would be able to ensure that the money is used for the intended purpose. For instance, if the government is making transfers to school students in the digital currency for buying books, it will be used only in bookshops.

2) Reduce the Risk of Fraud: Such functions can also be used by private firms to meet specified expenditures like fuel costs and business travel expenses of employees.

3) Improve Spending Efficiency: If properly implemented, this can improve the spending efficiency of the government and enhance citizens’ welfare.
For instance, the digital currency will augment cash transfers with a fair amount of certainty that the money will be used for the intended purpose.

Read More UPSC Topics-

What are The Challenges?

1) Time Requirements: Implementing such programmes on scale will take time.

2) Digital Literacy: The use of the CBDC requires basic digital literacy and access to a mobile phone.

Question for practice:

What are the benefits of RBI’s Central Bank Digital Currency (CBDC) or Digital Rupee?