Page 50 - Banking Finance February 2022

FEATURE

WHY RBI WANTS

A DIGITAL

CURRNCY

T he Cryptocurrency and Official Digital Currency kinds of central bank money—one made of paper/polymer

Bill, 2021, is scheduled to be introduced in the
notes (physical cash) that we use in our daily lives and the
ongoing winter session of Parliament. Further, as
other is the reserves maintained by commercial banks with
per an answer to a recent question in the Lok
are used by banks to manage interbank payments. The banks
Sabha, the government received a proposal from the Reserve the central bank. These reserves are in a digital form and
Bank of India (RBI) in October to amend the RBI Act, 1934, can also exchange these reserves for cash at the central
in order to enhance the scope of the definition of a ‘bank bank.
note’ and include currency in digital form.
In that sense, at the wholesale level, there isn’t much of a
Clearly, the Indian government and the RBI are getting difference given that money, in this segment, is already
ready to launch a central bank digital currency (CBDC). A digital. As Eswar S. Prasad writes in The Future of Money—
survey carried out by the Bank for International Settlements How the Digital Revolution is Transforming Currencies and
earlier this year found that 60% of the world’s central banks Finance: “The new technology does not fundamentally
are experimenting with CBDC technology and 14% had change the nature of the asset, as it is already digital, but
started pilot projects. enables banks to use it more efficiently and cheaply."

Given this, it is important to understand what a CBDC really If experts are to be believed, the retail segment—where a
is and what it isn’t; what it hopes to achieve; the significant chunk of money is still in cash—is the real ground
opportunities the shift is likely to throw up and the problems for near-term innovation. Retail CBDCs will essentially be
that it is likely to solve. digital currency issued by the central bank which will exist
alongside physical cash. A Bank of England discussion paper
What is a CBDC? says that the retail CBDC would be “denominated in pounds
In a speech in July, T. Rabi Shankar, a deputy governor of sterling, just like banknotes."
the RBI, defined a CBDC as a “legal tender issued by a
central bank in a digital form," which “is the same as fiat This digital currency would need an entirely new ecosystem,
currency and is exchangeable one-to-one with the fiat with the central bank—the RBI in the Indian case—
currency". managing the centralized payment system. This centralised
payment system, as Prasad writes, would be “linked to
The Bank of England, the United Kingdom’s central bank, electronic ‘wallets’ that reside on prepaid cards,
defines CBDC as “an electronic form of central bank money smartphones, or other electronic devices". Of course, the
that could be used by households and businesses to make money in these digital wallets can be spent in the same way
payments and store value". as physical cash.

Now, what does this mean in simple English? There are two This system sounds very similar to individuals using payment

50 | 2022 | FEBRUARY | BANKING FINANCE