Digital Rupee: Central Bank Digital Currency (CBDC)

In News

• In the 2022 Budget, the Finance Minister announced the launch of the Digital Rupee — a central bank digital currency (CBDC) — 2022-23 onwards.

About Central Bank Digital Currency (CBDC)

• Definition:
  • CBDC is a legal tender issued by a central bank in a digital form. 
  • It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. 
• Features: 
  • The underlying technology, form and use of a CBDC can be moulded for specific requirements. 
  • It is similar to a fiat currency issued in paper and is interchangeable with any other fiat currency i.e., CBDCs should be exchangeable at par with cash.
• Launch: 
  • The Reserve Bank of India will launch the CBDC from the upcoming financial year. 
  • This follows the government’s plans to launch the CBDC that will be backed by blockchain technology.
• Government’s intention:
  • The announcement in the Budget expresses the government’s intention on cryptocurrencies and other virtual currencies. 
  • The RBI has on several occasions flagged concerns of money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc and had planned to announce its own CBDC.
• Global presence of sovereign digital currencies:
  • Till December 2021, there are 87 countries (representing over 90% of global GDP) exploring a CBDC, compared to only 35 countries who were considering a CBDC in May 2020. 
  • Out of these, 9 countries (Bahamas, 7 eastern Caribbean & Nigeria) have now fully launched a digital currency. 
  • Nigeria is the latest country to launch a CBDC, the e-Naira, the first outside the Caribbean. 
  • However, the major countries with the 4 largest central banks (the US, the Euro Area, Japan, and the UK), are furthest behind.
  • There are 14 countries, including China and South Korea, who are now in the pilot stage with their CBDCs and preparing a possible full launch soon.

Image Courtesy: PIB 

Significance

• Acceptable electronic currency:
  • Central banks, faced with dwindling usage of paper currency, seek to popularise a more acceptable electronic form of currency (like Sweden);
• Issuance ease:
  • Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US);
• Avoid negative consequences:
  • Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies, and thereby avoid the more damaging consequences of such private currencies.
• More convenience to users:
  • The goal is to provide users with convenience and security of digital as well as the regulated, reserve-backed circulation of the traditional banking system.
• Digital economy:
  • It will give a big boost to the digital economy and India would be the first major country to officially launch its currency in such a manner.
• More accessible:
  • The development will make digital currencies more accessible to the people just as UPI made digital cash easier to use. 
• Remittances:
  • As the usage of the Digital Rupee increases, it could also benefit things like cross-border remittances, an environment could be created for interoperability whereby faster real-time remittance occurs. 
• Taxes:
  • The Government took a conservative stand on taxation by announcing a flat 30% tax on income from digital virtual assets or crypto. 
  • This 30% tax would be charged on income from transfer of virtual digital assets. 
  • No set off will be allowed in case of losses. 
  • Also, gifts in virtual digital assets would be taxed in the hands of the recipient.
  • Reaction of crypto Industry:
    • The crypto industry and experts welcomed the 30% tax rule for digital assets income. 
    • There was no negative impact on prices of most of the popular crypto tokens including Bitcoin, ETH, WRX, SOL, ADA, DOGE, MATIC listed on Indian exchanges.

Challenges

• Security risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
• Shield to Crime:  If not regulated and monitored properly, it can be used for Illicit Trading, Criminal Activities, & organised crimes.
• Price Volatility:  Prone to price fluctuations & waste of computing power.
• Lack of Consumer Protection: No Dispute Settlement Mechanisms and control of Securities and Exchange Board of India (SEBI). 
• Digital illiteracy: population of India is currently not equipped to deal with cryptos.

  Way Ahead

• There are several models proposed by technology experts and evangelists on how the Digital Rupee could be transacted.
• But a formal announcement by the Reserve Bank of India is awaited which will detail on how the Digital Rupee will be transacted by citizens. 
• The RBI should leverage the existing infrastructure through NPCI for a faster introduction and adoption of digital rupee across the economy through QR code system.

Sources: IE + PIB