What is Digital Rupee and how does it function?

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Finance Minister Nirmala Sitharaman revealed in her Budget 2022 speech that the Reserve Bank of India (RBI) will launch its own digital currency in the coming fiscal year.

The Digital Rupee, according to the FM, is a central bank digital currency (CBDC) that will be implemented in 2022-23.

She focused on how the launch of Central Bank Digital Currency (CBDC) would provide a huge boost to the digital sector today, while presenting the Union Budget for 2022-23 in Parliament. “Digital currency will also result in a more efficient and cost-effective currency management system,” she added.

What exactly is a CBDC?

CBDC stands for Central Bank of Canada. The Reserve Bank of India has released digital currency as legal money (RBI). “CBDC is a form of currency issued by a central bank that differs from paper cash” (or polymer).It is sovereign currency in electronic form, and it would be recorded as a liability on a central bank’s balance sheet (currency in circulation).

A CBDC’s underlying technology, shape, and application can be tailored to meet individual needs. According to the RBI website, CBDCs “should be exchangeable at par with cash.”

What is the definition of a currency?

“In modern economies, currency is a sort of money that is issued exclusively by the sovereign,” according to the RBI website (or a central bank as its representative). It is both a liability (and an asset) of the issuing central bank (and sovereign) and a holding public asset.

 Currency is fiat money, which means it is legal tender. The most common form of currency is paper (or polymer), although the form of currency is not its distinguishing feature.

What exactly is the purpose of a CBDC?

While CBDCs have sparked worldwide interest, only a few countries have progressed beyond the pilot stage in building their own.   According to the RBI website, “a BIS assessment of central banks in 2021 indicated that 86% were actively exploring the potential for CBDCs, 60% were experimenting with the technology, and 14% were executing trial programmes.”

What is the source of this sudden interest? CBDC’s adoption was justified for the following reasons:-

1. Central banks seeking to popularise a more acceptable electronic form of currency (as in Sweden); 2. Jurisdictions with significant physical cash usage seeking to make issuance more efficient (as in Denmark, Germany, Japan, or even the United States); 3.

3. Central banks seek to meet the public’s demand for digital currencies, as evidenced by the growing use of private virtual currencies, while avoiding the more harmful effects of such private currencies.”

CBDCs have several advantages over conventional digital payment methods.

“Because CBDC payments are final, they reduce financial system settlement risk. Consider a UPI system in which CBDC is traded instead of bank balances, as if it were currency; the requirement for interbank settlement is eliminated. CBDCs could also help payment systems become more real-time and cost-effectively globalised.

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