CBDC has been a buzzword with RBI kicking off the pilot. I will try to explain the What, Why & How of RBI’s CBDC, which would be true for most CBDCs globally. In this first part, we will explore the What & Why of it and will do the How part in the following post. These posts will mainly refer to the concept document from RBI, released in October 2022 (https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E0B4DFC9A6E506C2C24FFB6.PDF), because that’s all there is when it comes to e₹.
The first major mention of e-Rupee was in the Union Budget presented on 01st Feb, 2022. CBDC which stands for Central Bank Digital Currency is a global term used for legal tender issued by a central bank in digital form. e-Rupee is the name given to India’s CBDC.
Let’s start with Why RBI considered coming up with its own CBDC. I see two primary reasons- the first is to bring about a reduction in cash circulation. Cash management- right from Cost (printing, distribution, etc) to logistics, is a costly and inefficient method that RBI is trying to disrupt (remember demonetization?..eh). The second and more pressing reason I am quoting it right from RBI’s note referred to in the opening para- As of July 2022, there are 105 countries8 in the process of exploring CBDC, a number that covers 95% of global Gross Domestic Product (GDP). 10 countries have launched a CBDC, the first of which was the Bahamian Sand Dollar in 2020 and the latest was Jamaica’s JAM-DEX.
Currently, 17 other countries, including major economies like China and South Korea, are in the pilot stage and preparing for possible launches. China was the first large economy to pilot a CBDC in April 2020 and it aims for widespread domestic use of the e-CNY by 2023.
There is a reason why all countries are lining up in a hurry to come up with their CBDCs and it is what lies at the heart of the Blockchain/bitcoin revolution. The key word here is ‘decentralization’. As you might know, the primary motivation behind blockchain technology was the 2008 financial crisis and the general despise of the public against the ‘System’, which includes Banks- both commercial and central, Governments, etc. Thus, the idea of a decentralized currency was born of which Blockchain is the best-known example. While Bitcoin and many other such cryptocurrencies had a wild run since then, I have held a very strong opinion that no Sovereign will ever allow loss of control over Money! It is probably the most important control they have over the lives of their citizens and they will just not let it happen. Having said that, Blockchain technology will change the world (it already is..). I will save the larger discussion of Blockchain, Bitcoin, etc for another day. So in a nutshell, Governments/Central Banks don’t want a decentralized Crypto to grow which undermines their control. If you read the RBI concept note, there are more than sufficient words dedicated to explaining the oh! so very important functions the central banks undertake and how private cryptocurrencies pose a risk. Hope you can read what’s not spelled out. So that concludes my point on Why.
Now let’s get to the What part. To understand what is CBDC/e-Rupee better, we should delve a bit into what is Currency/Rupee. Our fiat currency-Rupee acts as the following three-
- Store of Value
- Medium of payment
- Unit of Account
So any new offering that tries to undertake functions of the Rupee, must fulfill the above 3 roles. I will straight get to the biggest question that I have had when I heard e₹ for the first time and I presume most other people would have the same question as well- How is it different from the money in my Paytm wallet or my savings account balance in my Kotak Mahindra Savings account? The key difference between the two is-
CBDC is issued by the Central Bank just like the physical rupee, whereas the balances we see in our accounts with Banks or wallets are provided by the Commercial entity we are dealing with. Simply put, the balance in Paytm wallet is as good as Paytm whereas the e₹ is as good as RBI. You can extend the logic to answer your specific case. All other differences stem from this key difference-
- e₹ is the liability of RBI whereas others are the liability of their respective institutions.
- e₹ will only carry sovereign credit risk, whereas the other also carries counter-party risks (Settlement risk, solvency risk, etc).
- e₹ account will be maintained with the Central Bank whereas the other (digital rupee) is held with commercial banks. (There is one finer point to keep in mind that we will note in the next post on How.
Hope I have been able to answer some questions about the Why & What that you had. Will follow up with How, in the next post.
Side note- the most unimpressive way to depict an impressive feat is straight from RBI’s concept note:
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