The Reserve Bank of India, like some of its global peers, has started what appears to be a long journey for the launch of a digital currency. And sensibly, the central bank has in line with the introduction of digital assets, decided to carry out pilot projects to assess the appetite or acceptance for a digital form of the rupee rather than be in a tearing hurry- if only to keep to the government’s budget proposal this year to launch a Central Bank Digital Currency (CBDC).

The digital rupee would appear as a liability on a central bank’s balance sheet, the RBI said in a concept note. “Currently, we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions,” the central bank said. “A token-based CBDC is a bearer instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them,” it said.

CBDC is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country’s unique requirements.

The Government of India announced the launch of the Digital Rupee — a Central Bank Digital Currency (CBDC) from the fiscal year 2022-23 onwards in the Union Budget placed in Parliament on February 1, 2022. The RBI is focused on evaluating the pros and cons of introducing the digital currency CBDC in India. It is also needed to design elements of this digital currency for the welfare of the citizens of the country. The key reason is that the design should be simultaneous with the stated objectives of monetary policy, efficient operations of digital currency, financial stability, and payment systems.

The Union Budget 2022-2023 has announced the introduction of the CBDC with an appropriate amendment to the RBI Act, 1934, that has been included in the Finance Bill, 2022. A graded approach is known as a structured method determining multiple factors to evaluate the impact of the object.

Thus, the RBI has proposed the three-step graded approach for the first digital currency of India, CBDC, to bring a change in the traditional financial system without a drastic impact. The Finance Minister of India has high hopes for the launch of the digital currency that can drive the digital economy to the next level.

That being said, the RBI is working on launching the digital currency in steps to not disturb the digital economy of the country with the sudden introduction of the CBDC. It is speculated that the graded approach will help to boost the process of the digital currency launch efficiently and effectively.


The Two Versions of CBDC

The central bank is considering the release of two versions of a CBDC: one that would be used by people for making retail payments and another that would be used for the settlement of transfers between banks and wholesale transactions. Ultimately, a CBDC could make payments more efficient, robust, and trusted, according to the RBI.

While the RBI recognized it may be desirable for small transactions to be as anonymous as using cash, it said providing privacy would be a challenge.

“The potential for [an] anonymous digital currency to facilitate [a] shadow-economy and illegal transactions makes it highly unlikely that any CBDC would be designed to fully match the levels of anonymity and privacy currently available with physical cash,” the central bank wrote.

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