RBI plans to launch a digital currency. How will it be different from crypto?

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Now is the time for a government-backed digital currency, RBI says

The Reserve Bank of India (RBI) wants to launch a digital currency by December 2021. Governor Shaktikanta Das said in an interview on Friday that the bank is working on a phased implementation strategy.

This is an important statement from the RBI, given the rise in popularity of the cryptocurrency. The Supreme Court has already overturned a 2018 RBI circular banning banks and financial institutions from providing services to individuals or businesses that process or settle digital currencies.

Read also: FOMO on crypto? Here’s what you need to know before you get started

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During a webinar last month, RBI Deputy Governor T Rabi Sankar said the time for CBDCs – the digital currencies of the central bank – has come.

What are CBDCs?

Simply put, they are the electronic version of fiat currencies. Both have a 1: 1 exchange ratio.

The idea that governments issue CBDCs, either as a replacement for or in addition to other forms of currency, is not entirely new. Some argue that the concept dates back to the 1980s, when James Tobin, an American economist who won the Nobel Prize in 1981, suggested that the US Federal Reserve could make “widely accessible media available to the public with the convenience of filings.” and currency security ”.

Is there a need for them?

The adoption of the CBDC was justified by three main reasons: central banks are facing a gradual decline in the use of paper money, so they wish to develop a more acceptable form of money; they also want to meet the demand for digital currencies, and thus avoid the more damaging consequences of these private currencies; jurisdictions with significant physical use of cash want to make issuance more efficient.

In addition, payments made by CBDC are final and thus reduce the risk of settlement in the financial system.

Difference between cryptocurrency and CBDC

Cryptocurrencies – Bitcoin, Ethereum, etc. – have become popular in recent years. If they continue to be accepted, national currencies with limited convertibility are likely to be threatened.

Digital currencies are encrypted, decentralized, and not bound or regulated by any government. A CBDC, on the other hand, will be a digital version of fiat money, backed by the government.

Cryptocurrency works independently; fiat money is issued by a central bank. The latter obliges intermediaries to make transfers.

The supply of fiat money is regulated and can be increased or decreased; the supply of cryptocurrency is limited.

In addition, fiat currencies can be kept in bank accounts; cryptocurrencies are stored in digital wallets.

Does India Need CBDC?

According to the RBI, our high ratio of currencies to GDP calls for a shift to CBDCs. If large cash transactions can be replaced by CBDCs, the costs of printing, transporting, storing and distributing change can be reduced.

Most cryptocurrencies are denominated in US dollars, a freely convertible currency. Therefore, the RBI believes that the rise of crypto may not affect the greenback. A digital currency developed by India could help maintain public preference for the rupee.


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