Emergence of the digital rupee: assessing the impact of CBDCs

What is a CBDC?

The Central Bank Digital Currency, popularly known as the eRupee, is a digital currency issued by the Government of India and is monitored by the Reserve Bank of India. In effect, it is considered a legal tender in an electronic form, and issued by the central bank.

A CBDC can be utilised nationwide and accepted as a sovereign currency. Although in its nascence, the RBI has coordinated several pilot projects to test the technology and better estimate its future on a broader scale.

CBDCs are not to be considered as or confused with cryptocurrencies. The key differentiator between the two is that, unlike cryptocurrencies like Bitcoin, the eRupee is regulated and issued by the Central Bank of India. Furthermore, unlike permissionless crypto assets, the digital rupee is an authorized blockchain backed by distributed ledger technology.

How will it impact India?

CBDCs possess the potential to benefit the nation in more ways than one. While we’re still a long way from reaching critical mass with respect to adoption, the eRupee represents the changing tide in India's financial chronology.

• Financial inclusion The technology can facilitate an inclusive financial ecosystem by permitting individuals without formal banking to access a range of financial services that were previously unavailable. CBDCs have the potential to enable the underbanked to access lending facilities by eliminating exit barriers.

• Quick and cheaper transactions Through reduced dependency on intermediaries and eliminating the cost associated with cash management, the digital rupee can lower costs and time requirements, consequently leading to financial efficiency.

• Lower exposure to fraud It is conceivable that CBDCs lower the risk of fraud because of features like transaction traceability, which make it easier to track and prevent fraudulent activity. Furthermore, CBDC is a programmed currency with predefined limitations and restrictions.

• Improved fiscal policies By lowering leakages and enhanced targeting, the programmable money features of CBDCs may make it possible for government benefits and subsidies to be distributed more effectively and directly. Furthermore, CBDCs can increase the number of people in the formal financial system and the tax base by giving the unbanked access to digital payments.

Conclusion While CBDCs hold great promise to revolutionise the Indian financial landscape, the current scenario is not free from challenges. With concerns regarding individual privacy, the need for improved national cybersecurity, the cost of development, and impending public trust and acceptance being raised, the eRupee has a long way to go before it can be widely accepted.

Several variables, including legal frameworks and digital infrastructure, are necessary to implement CBDCs effectively. Although there will undoubtedly be obstacles in the way, the prospects are too great to pass on.