Digital Rupee: How Is It Different From Cryptocurrency?

Digital Rupee: How Is It Different From Cryptocurrency?

The Reserve Bank of India (RBI) has recently launched its Central Bank Digital Currency (CBDC)-Retail pilot project called the digital rupee. India has joined a handful of nations to launch its own blockchain currency, which will help India cement its pre-eminence in digitalized finance.

The project is designed to bring about financial inclusion in India by enabling merchants to accept payments in local currencies and facilitate payments using a single platform. Nine central banks—including the State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Yes Bank, IDFC Bank, Kotak Mahindra Bank, and HSBC—are participating in this pilot project.

Let’s delve deeper into what the Digital Rupee is all about.

What is the Digital Rupee? 

According to the RBI, "A CBDC is a legal tender issued by the central bank in the form of a digital currency. There is no difference between the digital rupee and a fiat currency, and it can be exchanged one-to-one with a fiat currency. It just holds a different form.” In simple words, the digital rupee is just the digital form of the physical rupee that can make transactions and settlements easier. 

The Similarity 

Both cryptocurrency and central bank digital currency use blockchain as their underlying technology. Blockchain technology allows all transactions to be tracked on the ledger without the ability to modify the past leading to transparency and easy bookkeeping. 

Digital Rupee Vs Cryptocurrency

CBDC is a digital version of paper currency issued by central banks like the Reserve Bank of India and can be exchanged for cash while cryptocurrency is decentralized money that is free from any government or bank. It is mainly dependent on blockchain technology and cryptography to secure transactions made by people, thus making it nearly impossible to counterfeit. 

Cryptocurrencies are decentralized, which means the asset is free from governing bodies like RBI. As opposed to cryptocurrencies, the digital rupee will not be decentralized. The CBDC is a technology-driven currency of the RBI with control over supply and utilization. 

“Unlike cryptocurrencies, a CBDC is not a commodity. Rather, it is a digital representation of the value of a fiat currency and not a claim on commodities or digital assets. Cryptocurrencies do not have any issuer; they are not money (certainly not currency) as the word has come to be understood historically,” as said in the announcement made by the Reserve Bank of India.

The digital rupee will be the new legal tender in India, which means people can use it for purchases. An e-rupee will be distributed in both retail and wholesale versions, with the wholesale version used in interbank settlements and the retail version in circulation. Digital currency can be distributed by commercial banks even though the RBI issues them.

Do We Need The Digital Rupee? 

The most important reason for the launch of a digital rupee is to propel India's virtual currency adoption forward. Not only RBI’s digital rupee will be exempted from tax regulations, but it will also come with a lot of benefits like lower transaction costs, fast cross-border transactions, real-time account settlements, real-time tracking, and many more. 

Moreover, being issued by the RBI itself, the newly introduced digital rupee holds the same trust as physical currency. Yes, there could be some problems in the initial phases, but the central bank will offer advanced features and applications to users in the future.