Union Budget 2022: What is digital currency or Central bank digital currencies (CBDCs)?: Finance Minister Nirmala Sitharaman announced in her budget speech, that the RBI will soon introduce a digital rupee — using blockchain and other technology in 2022–23. The move comes amid deliberation over the regulation of cryptocurrency.
What is digital currency?
Central bank digital currencies or CBDCs are legal tender created by the central bank of a nation. The only difference between digital currency and traditional cash is that CBDCs are digital.
But unlike other cryptocurrencies that are DeFi or decentralised financial tokens, CBDCs are backed by the central bank just like all other currencies.
So, the digital rupee is essentially going to be the digital representation of a rupee backed by the Reserve Bank of India (RBI).
How would the digital rupee work?
Digital money is like the paper rupees that you take out from an ATM. The digital rupee wouldn’t completely replace all paper currencies, so you could still withdraw cash, but a portion of the reserve would be made available digitally.
Though the concept of Central bank digital currencies or CBDCs, was directly inspired by cyptocurrencies like the Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
So, it essentially means that the digital rupee is as good as a physical rupee for all transactions. A digital rupee will have the same value as the physical rupee.
Digital currencies are easy to use, just as the introduction of UPI made digital cash easier to use.
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