Budget 2022 | Digital Rupee will bring a new wave of financial transactions

Blockchain powered digital rupee by RBI will be introduced in 2022-23 in India.

Budget 2022 has not disappointed in terms of the government paving the way to increased digitalisation of financial transactions in India. In fact, the world over, central banks are exploring the idea of digital currencies backed by the sovereign. The proposal to introduce a Central Bank Digital Currency (CBDC) in India is yet another step in that direction.

During the Budget announcements, Finance Minister Nirmala Sitharaman has proposed to amend the Reserve Bank Act, 1934 to include the CBDC which is proposed to be introduced by financial year 2022-23 using blockchain technology.

The CBDC is the digital form of legal tender which will be issued and regulated by the RBI. It can be exchanged one-on-one with fiat currency. While this move can also be interpreted by the financial sector as the government’s way of giving competition to the increased prevalence of crypto currencies in India, the long-term view is that it will boost the digital revolution.

While the timing of the introduction of the CBDC seems to be affected largely by the sudden surge of private crypto currencies with the likes of Bitcoin, there is no denying that the CBDC can bring in an extremely positive shift in financial transactions. As the currency would be backed by the sovereign, it will not be highly volatile, thus providing much-needed stability desirable for economic stability, and confidence-building while undertaking transactions at a global level. In addition, the fact that it is digital would ensure reduction in the high cost of printing and distribution of physical currency money.

The CBDC will reduce the settlement risk in financial transactions with the requirement of reduced intermediaries compared to the current operations within India as well as for cross border transactions. The operations will be cost-effective in terms of global payments enabling the disbursements to take place on real time basis, further reducing the timelines associated with international trade operations.

Although the digital revolution is a much-desired one, the CBDC comes with its own set of difficulties. The structure of banks, as we know today, will undergo a significant change with the advent and larger prevalence of the CBDC. The primary reason for this paradigm shift would be the gradual reduction in bank deposits which is the key purpose for their existence.

While the exact structure of the CBDC transactions is not yet out, given the nature of virtual currency, it would operate through individual wallets. The digital transactions will take place without several intermediaries thus reducing the roles of banks in the future.

Even though the CBDC, as per the budget announcement, is going to be backed by the more promising and reliable blockchain technology, the virtual world is prone to cyber-attacks. Accordingly, if it is not accompanied by a robust IT system put in place by the government, the reliability will be severely affected.

One important point to note is that even though it currently seems like a competition to the private crypto currencies, it has superiority in terms of it being backed by the government. The CBDC’s supply can also be controlled by the sovereign giving it much credence in comparison to the crypto currencies.

Finally, the need of the hour is consumer education, which is the only way of ensuring successful penetration of the CBDC. The two major events of the past few years — the demonetisation and the COVID-19 pandemic has demonstrated that India is quick in adopting the process of digital payments. However, given the massive shift expected with the introduction of the CBDC in terms of India’s financial fabric, the penetration has to be deeper, reaching the far-ends of the rural economy.

This is the behemoth challenge which the government will have to successfully tackle if the CBDC experiment is to thrive ensuring India becomes a trail blazer in the world of digital transactions.

Rashmi Deshpande is Partner, Khaitan & Co. Views are personal, and do not represent the stand of this publication.