Finance Minister Nirmala Sitharaman in the Budget had announced the RBI’s intention to issues Digital Rupee or Central Bank Digital Currency (CBDC) in the coming fiscal year.

While responding to a question on digital rupee at the India Global Forum’s annual summit in Bengaluru recently, she said “It was a conscious call taken in consultation with the central bank — the Reserve Bank of India….we would like them to design it the way they would like to do it, but this year we expect the currency to come out from the central bank itself.”

“We see clear advantages in a central bank-driven digital currency, because in this day and age, bulk payments happening between — countries, large transactions between institutions and large transactions between central banks themselves of each country — are all better enabled with digital currency,” she further said.

From the above it is clear that the RBI is in the process of floating a digital currency though its details are yet to be announced.

Earlier the RBI had tried to put some curbs on crypto currencies transactions. But the Supreme Court ruled that such restrictions were out of proportion.

The Supreme Court said the government and the RBI did not have any clarity on the legality of crypto currencies.

On 25 February, while dealing with a Money Laundering case, the Supreme Court asked the additional solicitor general: “We would like you to tell us how you are dealing with persons trading in Bitcoin and crypto currency. Is handling crypto currency still illegal in India?”

So in government circles there is no clarity on the legality of crypto currencies. It is a different matter that the Finance Minister has decided to tax capital gains on such transactions and also with a provision to deduct tax at source, without bothering whether the transaction is legal or not.

Now the question arises, if the RBI starts its own digital currency, in what way it will be different from private crypto currencies?

Unit of currency

If the RBI’s digital currency is also termed as Rupees, then how will it be different from the Rupees already in use? If it is going to be called Super or Digital Rupee, what will its conversion factor be from the existing rupee? In such eventuality will market forces be allowed to determine the exchange rate?

All banks allow transfer of funds by digital mode and hence the deposits with the banks are already equivalent to Digital Currency. Just as private Crypto currency can be transferred now, in the same way any funds from any bank can also be transferred.

There are various avenues like NEFT, RTGS, and IMPS etc. for transfer of funds. Then why there should be a separate Digital currency from RBI?

Moreover floating of Digital Currency by RBI amounts to RBI taking deposits from public directly, which at present it does not do. The RBI only maintains accounts for banks (Bankers’ bank) and government (Banker to the government) and does transactions on their behalf. If the regulator starts doing banking business, then who will regulate it?

It is not clear whether the CBDC will use the same (decentralised) block chain technology used by other crypto currencies. If so, then the RBI can’t have any control on the issue or maintenance of the quantum of such currency and the unit of currency can’t be equivalent to the present rupee. Permitting two different legal tender within a country may lead to lot of confusion. It may nullify the effect of the monetary policy of the central bank.

People use crypto currencies as a speculative investment. It is also suspected that the currency is used for illegal activities and money laundering activities.

No central bank operated digital currency can allow such illegal activities and hence there may not be many takers for CBDC.

As of March 2022, there were only nine countries and territories that have launched CBDCs. They are all very small nations. The RBI should not jump to issue its digital currency.

There is no urgent need for a CBDC.

The writer is a retired banker

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