What is Digital Rupee and how it is different from Bitcoin and other cryptocurrencies

Digital Rupee or Central Bank Digital Currency (CBDC) will be the next attempt by the RBI to boost India's digital economy. Presented at the Union Budget 2022-23 by Finance Minister Nirmala Sitharaman, the concept of the Digital Rupee is meant to take some inspiration from cryptocurrencies like Bitcoin, but with the regulations of the central bank.

Digital Rupee or CBDC will work "using blockchain and other technologies," the Finance Minister said during the budget presentation. So that is one aspect that all the cryptocurrencies share with the upcoming digital currency of India. The other is the problem it means to solve - India's digital currency will "lead to a more efficient and cheaper currency management system," the minister highlighted.

With such benefits leading to projected growth in India's digital economy, the budget plans for 2022-23 mention the launch of the Digital Rupee, issued by the Reserve Bank of India. This last bit of information seems to be the only big difference between the CBDC and Bitcoin or some other cryptocurrency, even though their purpose of existence might be the same.

Here is a look at this in detail.

What is Digital Rupee or CBDC?

The Reserve Bank of India (RBI) defines Central Bank Digital Currency (CBDC) as a legal tender issued by a central bank in a digital form. In simple words, it is a digital form of the fiat currency, i.e. Indian Rupee. It is thus, exchangeable one-to-one with the fiat currency.

What is the use of Digital Rupee?

CBDC will bring with it, all the benefits that we see with cryptocurrencies as well as digital forms of payments. To start with the former, a digital currency can never be torn, burnt or physically damaged. They cannot be physically lost either. The lifeline of a digital form of currency will thus be indefinite as compared to notes.

The simultaneous shift to digital forms of payments will also bring its own set of benefits. As transactions will go digital, the government will save on the cost of printing currencies. The transactions will be instantaneous and will be accessible in more remote areas.

The Digital Rupee will bring with it, one more huge advantage with respect to cryptocurrencies. It will be regulated by a central body, mitigating the volatility risk associated with other such digital currencies like Bitcoin. And this brings us to the only big difference between the two.

Digital Rupee different from Bitcoin

It was earlier not known how India's own virtual currency will shape up. The new budget has shed some light on the same, confirming the use of blockchain and other technologies for its use in the country. While this was earlier considered to be a difference between Digital Rupee and Bitcoin, there is now little left to differentiate between the two.

Blockchain technology, by nature, is decentralised, meaning that all its information is stored across a network of computers. This brings increased resilience to the data against errors as well as cyber threats. For cryptocurrencies like Bitcoin, this network is spread globally across the systems of its developers.

Digital Rupee will have a slightly different version of this. Since the currency will be regulated by the RBI, it will not be truly decentralised in nature. Meaning there is, in fact, one entity controlling its issuance and distribution, just the opposite of what decentralised would mean in a true sense.

The "decentralised" adjective, thus, only stands true for blockchain technology and its network of computers in the case of the Digital Rupee. RBI will have to set up this network going forward, but the blockchain network will be limited to the bank and the associated entities. As a report by PWC highlights, CBDC may need "an underlying system for issuance and distribution to the public" and for this, the RBI may have to include public and private banks, payment service providers (PSPs) and operators on the network.

A wider ecosystem would then entail the involvement of other financial institutions and third-party service providers. So, even though the Digital Rupee will follow the issuance models of the physical currency, a setup needs to be in place for it.