Central bank digital currencies (CBDCs) are the digital equivalent of a country's currency, issued and controlled by the central bank of the country.
Unlike any other cryptocurrency, such as Bitcoin issued on decentralised networks, CBDCs are issued and underwritten by the central bank and represent legal tender.
That is to say, a CBDC is evolution and not reinvention, much like digital banking itself has evolved from offline cheque-based banking.
India’s CBDC is called e-Rupi, which is based on a Blockchain, and distributed ledger on technology. This provides an opportunity for both transparency and security. The digital rupee is supposed to provide a fast payment solution while decreasing the cost associated with printing, storing, and distributing physical currency.
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Potential Of CBDCs In India
Indian authorities see the digital rupee as one step further towards modernisation of the financial ecosystem.
With the advancement in smartphone usage and access to the Internet, CBDCs could further improve the means of inclusion with banks at times in places where banking infrastructure is minimal.
They also hold promise for faster cross-border transactions and reduced dependency on cash, which is a massive plus since more than 70 per cent of transactions are still cash-based in the country.
Do CBDCs Replace Money?
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Digital rupee may prove to be transformative in the near future due to various reasons and to some extent, partly replace physical cash and bank deposits.
1. Digital Divide: Even though the number of smartphones and Internet usage is increasing, the chunk of India's population is still deprived of digital infrastructure. It is a must to ensure universal access; otherwise, it becomes impractical to replace physical cash with CBDCs.
2. Trust And Awareness: Trust in CBDCs has to be created. People need to know how to use the digital rupee safely and be aware of its benefits over cash or even traditional digital payments like Unified Payments Interface (UPI).
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3. Interoperability With Existing Systems: For acceptance, the digital rupee needs to seamlessly integrate itself in platforms like UPI, which is already dominating India's payment domain. Otherwise, adoption might be take place gradually.
4. Privacy issue: CBDC will likely reduce anonymity than cash. It should, therefore, warn the user on danger of surveillance and threats on data privacy.
CBDCs are unlikely to replace traditional fiat money soon, but it is definitely one of the major landmarks of the financial development of India. The digital rupee aims to complement rather than displace systems existing hitherto; it ensures efficiency, transparency, and lower operational costs.
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In this regard, the critical question is not about the fact that CBDCs will eventually replace money but how they could complement physical cash and digital payment systems toward a more inclusive and efficient economy. The digital rupee, at least so far, remains an exciting experiment placing India at the cutting edge of the new shift in the use of central bank digital currencies.
