Budget 2022: Proposed to introduce Digital Rupee by RBI using blockchain technology in FY 22-23, says FM The government has proposed to issue a digital rupee managed by the RBI, FM Nirmala Sitharaman announced in the Union Budget 2022 today.Introduction of a Digital currency by central bank will lead to cheaper currency management.The FM said that the digital rupee issued by RBI will use blockchain technology starting from Fy 2022-23.
PM Modi on Wednesday said that the digital currency will boost the digital economy in the year to come, adding that the RBI-backed CBDC will be controlled and monitored by the central bank and will be a digital avatar of India’s fiat currency.The PM hinted that the RBI’s digital currency will be a legal tender, being a revamped version of the physical currency.Modi said people could convert digital currency to physical currency and vice-versa with ease, which will strengthen India’s digital economy and ecosystem.
The digital payments and online transfer of funds will be more safe, secure and risk-free with the launch of CBDC, Modi said.He added that this will also streamline the global digital payment system.
“In 2022-23, the RBI will usher the rupee into its digital avatar, ‘powered by blockchain’.
It will be interesting to understand, what problem will be solved by this Indian CBDC.Our consumer payment system (including UPI) is already world class and many transactions have moved away from cash to mobile payments.Our fintech ecosystem continues to innovate with new use cases to meet changing consumer needs.
Our interbank payment systems have national reach.It is not easy to see how a CBDC can increase financial inclusion – beyond current modes enabled with Jan Dhan, Aadhar and mobile payments.In fact any blockchain based system will need to solve for the classic trade-offs between decentralization, security and scalability.A CBDC could potentially provide an impetus to stable coins in the crypto world.This is where the thinking behind the digital rupee needs to be closely linked to our posture with regulation of crypto and Web3,” said Mahesh Makhija, Technology Consulting Leader, EY India.
The Centre had informed Lok Sabha last year that the Reserve Bank of India (RBI) is working out a phased implementation strategy for introduction of Central Bank Digital Currency (CBDC) by examining use cases, to avoid any disruptions.
It further said that the RBI moved a proposal in October seeking to amend the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form.
“The purpose of creating a digital currency is to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs and reduced settlement risk,” MoS Finance informed Lok Sabha in its reply.
The CBDC is a digital version of fiat currency that can be exchanged via blockchain-based wallets and is regulated by the central bank.
Despite the fact that CBDCs were inspired by bitcoin, they are distinct from decentralised virtual currencies and crypto assets, which are not issued by the government and lack the status of “legal tender.”
Mr.Rishad Manekia, Founder and MD, Kairos Capital, said ” The taxation of private digital assets i.e.crypto currencies and digital gold at 30 per cent along with no deductions or setoffs is a good thing.This along with taxation of digital assets received as gifts will act as a disincentive for young investors who may be unfamiliar with this space.The taxation along with the introduction of an Indian CBDC in 2022 gives a much clearer idea about the way forward for the blockchain ecosystem in India and how the government is thinking about this space”
T Rabi Sankar, Deputy Governor, Reserve Bank of India on Central Bank Digital Currency (as per his speech in July 2021):
What is a CBDC?
It is important to understand and appreciate what precisely is a CBDC, and to do that one needs to understand what a currency is and what money is.
What is a currency?
Let us start with money.
As societies developed from hunters and gatherers material needs increased – to build a house, wear clothes, make weapons and implements etc.Since these needs could not be produced individually, people had to purchase them from others.These purchases were paid initially by barter – a leather skin cloak for a spear, maybe.
As barter had its limits – how many cloaks for a spear – barter got standardized in terms of metals or cowrie shells.
Now people knew the value of both the cloak and the spear in terms of bronze or cowrie shells.This was still barter, as both bronze and shells had intrinsic value (shells were desired for their beauty).This system evolved over time into metal currencies.Gold and silver coinage were the offshoot of this system where they had features of barter (both gold and silver had intrinsic value) as well as money (they were standardized representation of value).Somewhere along the way people improvised – instead of actual goods for barter they started using claims on goods, a bill of exchange in fact.
These could be clay tablets in Mesopotamia or, as in China in the eleventh century, paper currency.
In respect of money two facts emerge historically.
Money has taken the form of either commodities (which have intrinsic value) or in terms of debt instruments.When money does not have intrinsic value, it must represent title to commodities that have intrinsic value or title to other debt instruments.Paper currency is such a representative money and it is essentially a debt instrument.The owner of the currency knows who owes him or who has the underlying liability.There is always an ISSUER of representative money.
Money is usually issued by a sovereign.
Private issuance of money – whether under sovereign license or otherwise – has existed in the past but has over time given way to sovereign issuance, for two reasons.Firstly, being a debt issuance, private money is only as good as the credit of the issuer.By definition, there can be multiple issuers.This makes private currency unstable.On the other hand, public currency, as it is backed by a sovereign, is unique to an economy and has better credit standing; therefore, it is more stable.
Secondly, paper currency involves seignorage – the difference between the intrinsic value and the representative value which accrues to the issuer.This seignorage should not accrue to any private individual.It should accrue to the Government and thus used for public spending.
Now we are in a position to provide a definition of a currency.In modern economies, currency is a form of money that is issued exclusively by the sovereign (or a central bank as its representative).It is a liability of the issuing central bank (and sovereign) and an asset of the holding public.Currency is fiat, it is legal tender.Currency is usually issued in paper (or polymer) form, but the form of currency is not its defining characteristic.
What is a central bank digital currency?
Having defined a currency as a liability issued by the central bank, we are now in a position to define a CBDC.A CBDC is the legal tender issued by a central bank in a digital form.
It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
Only its form is different.
It is also important to understand what a CBDC is not.CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade.Private virtual currencies sit at substantial odds to the historical concept of money.They are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic.Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities.There is no ISSUER.They are not money (certainly not CURRENCY) as the word has come to be understood historically.
A line of argument that has helped private virtual currencies gain some degree of legitimacy is that most money in modern societies is in fact already private since they represent deposit liabilities of private banks.
There are two factors that are conveniently pushed under the carpet.One, deposits are issued by banks under license of the sovereign issuer of currency (usually the central bank).Two, deposits are accepted by the public only because they are convertible one-to-one into sovereign currency.A simple way to understand the distinction is to look at deposits as lending of sovereign currency to banks by the public, on interest (credit, its opposite side, is lending of sovereign currency by banks to the public, on interest).Bank deposits are money, certainly, but they have no independent existence as money, shorn of sovereign authority and the resultant public confidence.In any case bank deposits are very different from private currencies which (a) do not have an issuer, and (b) are not convertible one-to-one into the sovereign currency.
To sum up, CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer).It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet.
The underlying technology, form and use of a CBDC can be moulded for specific requirements.
CBDCs should be exchangeable at par with cash.
( Originally published on Feb 01, 2022 ) In Video: Budget 2022: Proposed to introduce Digital Rupee by RBI using blockchain technology in FY 22-23, says FM Read More News on budget 2022 digital rupee rbi digital rupee rbi central bank digital currency (Your legal guide on estate planning, inheritance, will and more.All you need to know about ITR filing for FY 2020-21.)
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