India's E-currency Explained: How It Is Different From Cryptocurrency & Why India Needs It

While cryptocurrency operates independently, a fiat currency is issued by a country's central bank. The latter requires intermediaries to make transfers.

Reserve Bank of India | File Image

New Delhi: If the implementation strategy goes as per the plan, the Reserve Bank of India (RBI) will roll out a pilot for India’s very own digital currency by December. The latest innovation will bring changes in the way currency is held and used in the future.

However, the idea is not to replace physical money, or replicate cryptocurrencies.

What’s CBDC?

Known as Central Bank Digital Currencies, or CBDC, it is a legal tender in digital form, and basically the online version of their respective fiat currencies. In the case of India, it would be the digital rupee. It is no different from the money that we hold today.

For instance, Rs 100 held digitally will be like Rs 100 held in physical cash. China, Europe, and the UK are looking at digital currencies to be issued by them, either to commercial lenders or to the public directly.

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The central bank is considering various aspects of digital currency from security, impact on the financial sector, and its impact on monetary policy and currency in circulation. Das added that the RBI is also considering having a centralized ledger for the digital currency or the so-called distributed ledger technology (DLT).

DLT is a digital database that allows multiple participants to access, share and record transactions simultaneously. On the other hand, a centralized ledger will mean that the database is owned and operated by a single entity — in this case, the central bank.

Why Does India Need It?

RBI states that the high currency to GDP ratio focuses on the need to switch to CBDCs. In a situation where large cash transactions are replaced by CBDCs, the cost of printing, transporting, storing, and distributing currency can be reduced. The RBI says that payments using CBDCs are final and thus reduce settlement risk in the financial system.

How's It Different From Cryptocurrency?

Experts believe that the growing popularity of cryptocurrencies has prompted central banks to explore digital currencies but the RBI offering of digital currency will be much different in form and structure from the likes of Bitcoin.

Cryptocurrencies in their present form are not a form of currency but a privately created asset. Even as some businesses accepted it as a form of payment and Bitcoin obtaining the status of legal tender in one of the countries, they don’t have any intrinsic value and neither backed by any sovereign authority.

"Unlike cryptocurrencies such as Bitcoin and Ethereum, these currencies (CBDCs) promise less volatility and greater security. In addition, they will have the support of their respective monetary institutions, responsible for ensuring financial stability," says Spanish financial services provider BBVA.

While cryptocurrency operates independently, a fiat currency is issued by a country's central bank. The latter requires intermediaries to make transfers.

Moreover, the supply of fiat currency is regulated by the central banks which can be controlled depending on the usages but the supply of cryptocurrency is limited.

It is interesting to note that a currency marked as a legal tender can be kept in bank accounts whereas the cryptocurrencies need to be stored in digital wallets. Based on its extent of usage, CBDCs can lead to a reduction in the transaction demand for bank deposits and reliance on cash.