#ShortReads: What Do We Know About RBI’s Digital Currency?

The recent statement by the RBI Governor shows that India might launch its digital currency sooner than we think.

Pilot For Digital Currencies

RBI Governor Shaktikanta Das confirmed in a TV interview that the Reserve Bank of India could come with a pilot of its fiat digital currency by the end of 2021. Das stated that the central bank is also exploring the choice between having a centralised ledger for the digital currency or the so-called distributed ledger technology (DLT).

Das added, as mentioned by CNBC, “We are being extremely careful about it because it’s completely a new product, not just for RBI, but globally.” Das also told CNBC, “I think by the end of the year, we should be able to — we would be in a position, perhaps — to start our first trials.”

This is not the first time we are hearing about the RBI’s efforts towards creating a digital currency. Earlier in July, Deputy Governor of the RBI, T Rabi Sankar told that time for launching a digital currency is now. Later on August 6, during the last monetary policy review, Sankar told that the RBI is anticipated to launch a fiat digital currency by December.

More About The Currency

The Central Bank defined Central Bank Digital Currency (CBDC) as a legal tender issued in a digital form. It is the same as a fiat currency, and is exchangeable one-to-one with the fiat currency. However, a CBDC is not comparable to the private virtual currencies like Bitcoin, and Ethereum. Private virtual currencies have no legal issuers, and therefore cannot be considered legal tender or currency, unlike the CBDCs.

While cryptocurrencies operate independently, a fiat currency is issued by a country’s Central Bank. The latter needs intermediaries to make transfers. Also, the supply of fiat currency is regulated by the Central Banks, and they can be increased or decreased depending on the usages. On the other hand, the supply of cryptocurrency is limited. A currency marked as a legal tender can be kept in bank accounts, but cryptocurrencies have to be stored in digital wallets.

The Need For A CBDC

According to the Central Bank, India’s high currency to GDP ratio calls for a switch to CBDCs. We all know how much Indians love using cash, but if large cash transactions can be replaced by CBDCs, the cost of printing, transporting, sorting, and distributing currency can be reduced. The RBI also said that virtual currencies might encourage the use of U.S. dollar. So, a digital currency developed by India might help retain public preference for the Rupee.

It is not only India, but many other countries are also interested in developing their own digital currencies. The frontrunner on this is the People’s Bank of China, as it has already launched real-world trials in place across several cities. The European Central Bank is also planning to develop a digital euro, while the Bank of England is also looking into a U.K. CBDC.

Zooming Out

Cryptocurrencies are becoming more and more popular every day, and we are also seeing more Indians investing in crypto assets. However, cryptocurrencies like Bitcoin, Dogecoin, are not regulated by any entity, and they are also highly volatile. On the other hand, CBDCs are marked as a legal tender, and they are a tradeable asset, so they will have widespread acceptance. This will also help us reduce our dependence on cash, and also support our ‘Digital India’ initiative. We have to wait, and see how the trials go, in order to get a clear picture on how fiat currencies will help us build a better future.

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