RBI Launches Digital Rupee Pilot Project: How Is RBI's Digital Currency Different Than Cryptocurrencies
Read on to understand what is RBI's digital currency and how the RBI’s Digital Rupee is different from regular cryptocurrencies.
The Reserve Bank of India (RBI) recently said in a statement that India’s first pilot project of the ‘Digital Rupee’ in the ‘Wholesale segment’ would be starting on November 1, 2022. The pilot project for the ‘Digital Rupee’ for the ‘Retail segment’ is set to start in a few months in select locations in a closed group of customers and sellers. As of now, 9 banks have are decided for participating in RBI’s Digital Rupee Wholesale pilot; HDFC Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, HSBC, Union Bank of India, ICICI Bank, HSBC and SBI. What is this ‘Digital Rupee’ that the RBI is so keen on launching and how is it different from the vast variety of ‘decentralised digital money’ in the form of cryptocurrencies that already exist? Let’s try and understand.
Understanding RBI’s Digital Rupee
As per the official definition, RBI’s Digital Rupee is a type of ‘Central Bank Digital Currency’ or CBDC. In simpler terms, the Digital Rupee is a digital form of the fiat currency of the Rupee issued by the RBI (as Central Bank of the country). Digital Rupee or digital money in general is an electronic form of money that can be used for digital contactless transactions, which are especially useful in times of the pandemic. CBDCs can be of two types: Retail CBDCs, which are available for use for everyone, and Wholesale CBDCs, which are meant for limited use between select groups. Finance Minister Nirmala Sitharaman announced during the Union Budget 2022, that the Digital Rupee would be launched soon.
What Is The Difference Between Digital Rupee And Cryptocurrencies?
At its core, cryptocurrency is a type of digital asset that is decentralised in nature, meaning it is not regulated by any country’s central bank or any single party. Moreover, cryptocurrencies are generally not backed by any financial support, so their prices are purely dependent on the cryptocurrency market trends. While the prices of most cryptocurrencies are highly volatile, the possibility of making extensive profits also exists in trading and investing in cryptocurrencies. Very early investors in cryptocurrencies like Bitcoin and Ethereum have now become multi-millionaires. However, the risk of losing all of your funds if you end up investing in the wrong cryptocurrency also exists. Many countries’ governments around the world do not recognise crypto as a legitimate form of currency. Most people use cryptocurrencies as a form of investment rather than as currency, which was its intended purpose. Cryptocurrencies cannot be used to pay for transactions or officially transfer funds, hence their scope of use cases is quite limited.
On the other hand, a Central Bank Digital Currency like the Digital Rupee is formally backed by the government, meaning it holds real value backed by real money from the government. Digital currency can also theoretically be exchanged for real money at ATMs or digitally and can be used for making digital payments, online payments and for contactless transactions. Moreover, the records of digital currency transactions would be stored with the government, so it’s very transparent and the risk of hacks and frauds will also be very low. On a fundamental level, a digital currency is different from a cryptocurrency due to the fact that digital currencies hold real value since they are backed by the government and are centralised, while cryptocurrencies are kind of speculative currencies/assets not backed by anyone and are decentralised in nature.