The Reserve Bank of India is preparing to launch a Central Bank Digital Currency (CBDC). Although India is already a leader in digital payments, cash remains dominant for small-value transactions, and an official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
A CBDC uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is essentially a legal tender issued by the central bank. It has the same functional capabilities as a fiat currency and is considered exchangeable with said fiat currency in a one-to-one form. The only notable difference is the form it takes, i.e., a digital form. CBDC would coexist with cash and existing digital payment methods.
Transacting with CBDC would be an instantaneous process as the need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another. Moreover, foreign trade transactions could be speeded up between countries adopting a CBDC.
There was much conjecture regarding the cryptocurrency last year to which RBI has expressed concern on several occasions, citing issues such as money laundering and terrorism financing. The regulator banned banks and other regulated entities from supporting crypto transactions about three years ago, but the Supreme Court overruled that ban last year.
For now, the Indian banking system needs to pace up with the rest of the world, and this could be a good start to stay with the changing times.
