Context

• RBI Deputy Governor T. Rabi Shankar observed that Central Bank Digital Currency (CBDC) platforms could bring about a substantive change in the sphere of cross-border payments.
• He added that coordination across countries, and between the public and private sectors was, however, essential for that eventuality to take shape.

What is the digital rupee?

• • The digital rupee, or the e-rupee, is a central bank digital currency (CBDC) issued by the RBI. 
  • It is similar to the physical cash that you hold in your wallet except that the e-rupee is held electronically in a digital wallet overseen by the RBI. 
  • The digital rupee is recognised as legal tender by the RBI, and thus has to be accepted by everyone in the country as a medium of exchange. 
  • It is, however, different from deposits that you hold in a bank. Unlike deposits which are paid interest, the digital rupees in your wallet are not paid any interest by the central bank. 

• Deposits held in banks can be converted into digital rupees and vice-versa.

CBDC can be classified into two types

• Retail (CBDC-R): Retail CBDC would be potentially available for use by all;
• Wholesale (CBDC-W): Designed for restricted access to select financial institutions.

CBDC vs Cryptocurrency 

• The central bank digital currency should not be mistaken with a cryptocurrency.
• A CBDC is a central bank issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset. 
• This guarantee from a central bank reduces the CBDC risk, volatility, and ensures a larger acceptance across the globe. 
• On the other hand, a cryptocurrency is issued by a network and backed by a crypto asset which may or may not have the backing of any monetizable asset or physical asset. Therefore, the risk is higher and there is more price volatility and less acceptance as a money instrument globally.

Advantages

• • Experts point out that the move to bring out a CBDC could significantly improve monetary policy development in India with enhanced surveillance and real-time situational monitoring.
  • A CBDC can increase the transmission of money from central banks to commercial banks and end customers much faster than the present system. 
  • Digital fiat currencies create greater barriers to illicit activity, as physical cash can help conceal and transfer funds outside of regulated financial systems. With the growing adoption of CBDCs, payments and transfers will be easier to identify and trace to previous sources, significantly reducing the risk of fraud and money laundering.

• Fiat money is a currency that lacks intrinsic value and is established as a legal tender by government regulation. 

• • Digital currencies have all the intrinsic advantages of fiat currency like it is durable, portable and fungible. Being digital, it will make it easily verifiable, more secure and traceable. Hence, improving upon the existing advantages of paper currency.

• Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type.

Challenges

• Experts, however, observe that there are also certain negatives attached to the CBDCs. 
• The approach of bringing a sovereign digital currency stands in stark contrast to the idea of decentralisation. Cryptocurrencies, on the other hand, came into existence intending to eliminate the middleman, thereby establishing a system of trust without the need to depend on any single entity. CBDCs would again rely on the banking system, as these are just the digital version of fiat currency.
• Central banks might indulge in issuing more digital currencies which could potentially trigger higher inflation. 

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