Why govt decision to launch ‘digital rupee' is a big deal

In her Budget speech, finance minister Nirmala Sitharaman announced the launch of a central bank digital currency in FY 2022-23. A look at how it will be different from the rupee that we are used to, and the ways in which it could affect the economy

What is a central bank digital currency?

Digital currency may seem like a new concept, but if you use cards, netbanking or payment apps like Paytm and Google Pay, you are already part of the movement towards cashless transactions that it is designed to strengthen. CBDCs, though, are about more than just cashless transactions and could end up transforming the banking system.

The biggest nudge to governments’ digital currency push has come from the rise of cryptocurrencies like Bitcoin and Ether that have prompted speculation about the future of fiat currency – that is, currency backed by governments – as they claim to do most of the work of the modern banking system more swiftly and at a fraction of the cost.

How is CBDC different from cryptocurrency?

Although they are called ‘cryptocurrency’, Bitcoin, etc, are not currency but digital assets. They are privately issued and are not backed by any sort of authority, government or otherwise. But a fiat currency, such as the US dollar or the Indian rupee, is backed by a central bank, which guarantees its value.

CBDCs would be the electronic version of the physical currency and not a new currency altogether. According to RBI deputy governor T Rabi Sankar, it would represent “legal tender issued by a central bank in a digital form”.