Come December and the Reserve Bank of India (RBI) could be rolling out a pilot for India’s very own digital currency, an innovation that is tipped to change how currency is held and used in the time to come. To be sure, the idea is not to replace physical money, or replicate cryptocurrencies. Known as central bank digital currencies (CBDCs), these will, in fact, be much like the current system, although the underlying structure, founded on cash usage so far, would undergo a revolutionary change.
What Is A Digital Currency?
At face value, it is, as the name suggests, any currency that is held in digital form. That is, the user has a mobile app or online wallet through which she can make or receive payments. But it will be no different from money as we know it today. Rs 100 held digitally will be like Rs 100 held in physical cash. What would change though is the system that anchors the world of banking and finance, which stands now on the principle of direct cash transactions.
“A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different,” RBI Deputy Governor T Rabi Sankar said in July this year. The advantage that a CBDC offers is of greater efficiency and flexibility, allowing for better oversight and more seamless transactions.
“CBDC is the same as currency issued by a central bank but takes a different form than paper. It is sovereign currency in an electronic form and it would appear as liability on a central bank’s balance sheet. The underlying technology, form and use of a CBDC can be moulded for specific requirements. CBDCs should be exchangeable at par with cash,” Sankar added.
Will CBDC Be The Same As Cryptocurrencies Like Bitcoin?
While it may be argued that the emergence, proliferation and continuing popularity of cryptocurrencies acted as a nudge for central banks to explore digital currencies in the first place, the offering being planned by them will be much removed in form and structure from the likes of Bitcoin.