The official digital currency – or the digital rupee, as it is unofficially called – is what is known as a central bank digital currency (CBDC).
What is a CBDC?
Central bank digital currencies (CBDCs) are legal tender created by a country’s central bank, albeit in digital form. The only difference between them and traditional cash or fiat currencies is that CBDCs are digital.
Unlike other cryptocurrencies which are DeFi or decentralized financial tokens, CBDCs will be backed by central reserves like all other fiat currencies. The digital rupee will essentially be the digital representation of a rupee backed by the Reserve Bank of India (RBI).
India is not the only country to experiment with digital legal tender. The digital dollar, electronic yuan and digital euro are some of the projects that various central banks are experimenting with around the world.
Why do central banks issue digital currencies?
Countries are looking to CBDCs for a few key benefits: reducing printing costs, lowering settlement risks, avoiding time zone issues, and cost-effective globalization of payment systems.
Another important factor in the growing interest of central banks in CBDCs is to distract citizens from private virtual currencies that could harm them.
For India in particular, another benefit of RBI’s CBDC is that India’s high currency-to-GDP ratio could be reduced if cash usage was reduced by the introduction of the CBDC. While India has made huge strides in digital payments with UPI, the significant movement of cash remains a challenge due to the anonymity offered by cash.
How is it different from Bitcoin?
Unlike Bitcoin, which is a cryptocurrency built on the underlying blockchain technology allowing users to remain anonymous, the official digital currency will have the backing of the RBI. This means that the digital rupee is as good as a physical rupee for all transactions. A digital rupee will have the same value as the physical rupee.
Cryptocurrencies like Bitcoin have no intrinsic value. They are volatile and can present enormous risks to investors, as evidenced by sudden and rapid declines in value due to external factors. Cryptocurrencies are peer-to-peer assets that are not controlled by any authority or intermediary issuer. Bitcoin also works using a decentralized blockchain.
(Edited by : Shoma bhattacharjee)