RBI launches Digital Rupee: What is CBDC and how is it different from cryptocurrencies?

The Reserve Bank of India (RBI) on Tuesday launched the Digital Rupee pilot project with nine banks, including State Bank of India, HDFC Bank, and ICICI Bank, issuing the virtual currency for transactions in government securities.

The first pilot in Digital Rupee- Retail segment (e₹-R) is planned for launch within a month in select locations in closed user groups comprising merchants and customers. 

“The use case for this pilot is the settlement of secondary market transactions in government securities,” RBI said. The use of the Digital Rupee or Central Bank Digital Currency (CBDC) is expected to make the interbank market more efficient, India’s central bank said.

What is Digital Rupee?

According to the RBI, “A CBDC is a 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.”

While presenting the Budget in February, Finance Minister Nirmala Sitharaman said that CBDC will give a big boost to the digital economy. She also stated that it will be a more cheaper and efficient currency management system.

“The introduction of central bank digital currency will give a big boost to the digital economy. Digital currency will also be a more cheaper and efficient currency management system. It is therefore proposed to introduce Digital Rupee – using blockchain and other technologies – to be issued by the Reserve Bank of India, starting 2022-23,” FM Sitharaman said while presenting the Budget. 

Can CBDC be compared to cryptocurrency?

The CBDC cannot be compared to cryptocurrencies as the central bank said that it is not a commodity.

The Digital Rupee will also be centralised unlike crypto like Bitcoin, Ethereum, Tether, and Stellar among others. The cryptocurrencies are taxed at 30%. However, the digital rupee is exempted from this tax regulation.

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