The government of India today said it will introduce a digital rupee — a central bank digital currency — in the year starting April 2022.
The move was announced by finance minister Nirmala Sitharaman.
With this, India has become one of the few countries in the world to announce a date for the introduction of central bank digital currency.
China, a pioneer in this respect, has already done so on a limited scale and is testing out the system. The US and most European countries are yet to finalize their strategies.
Nirmala Sitharaman said India’s central bank digital currency will be based on technologies such as blockchain, without going into further details.
Central Bank Digital Currencies are considered an attempt to marry the resilience and convenience of the blockchain technology with the assurance and stability of fiat currencies.
Unlike ‘private’ digital currencies — issued by individuals, groups and companies, such as bitcoin and etherium — CBDCs tend to be pegged to the fiat currency of the country.
This makes them less volatile and more easy to use, unlike currencies like bitcoin, which fluctuate quite a lot every day, and even every hour, in their value.
However, given blockchain-based currencies consume a lot of energy and take a lot of time to process transactions, it remains to be seen if anyone would be interested in transacting in ‘Digital Rupee’.
Secondly, the rupee already has a digital form. Whenever a person uses a wallet or plastic card to make payment for an item in rupees, he or she is technically using ‘digital rupee’. The only difference, in this case, is that the transaction is processed using a system of centralized servers owned by banks and institutions like National Payments Corporation of India.
The only real advantage to having a blockchain-based digital rupee is that in the event of a natural disaster or war, the blockchain system is likely to remain functional, even if the traditional, bank-based wallets and cards stop working for some time.
It may also give greater privacy compared to bank transactions, but is unlikely to beat cash in this respect.
The higher resilience of the system is because the blockchain does not store its data on a central server or a group of central servers, but on a system called distributed ledger, with tens of thousands or even hundreds of thousands of copies of the transactions being stored and replicated at any time.
While this makes the system power-hungry and slow, it also makes it more resilient than the bank-based system.