India's own digital currency coming soon, know how different it is from other cryptocurrencies

Digital currency is the same as currency issued by a central bank but takes a different form than paper (or polymer).

New Delhi: A couple of months ago, the Reserve Bank of India had said that it is working on phased introduction of its own digital currency.

RBI Deputy Governor T Rabi Sankar said in a keynote address at the webinar organised by the Vidhi Centre for Legal Policy in the national capital.

What is a central bank digital currency?

CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer). It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form and use of a CBDC can be moulded for specific requirements. CBDCs should be exchangeable at par with cash.

Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits. It would be RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems, said an RBI statement.

CBDCs is likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation, added the central bank statement.

How different is RBI’s digital currency from other cryptocurrencies?

RBI’s digital currency or A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different. Meanwhile other Cryptocurrencies like Bitcoin, Ethereum or Dodgecoin are not considered as an equivalent to legal tenders. Infact, private cryptocurrencies have a lot of risks associated with them and volatility in their prices make it a dicey option for investors. Indian government has time and again reiterated that cryptocurrencies are not legal in India.