Central Bank Digital Currency (CBDC)

Context

The Reserve Bank of India (RBI) is all set to implement the Central Bank Digital Currency (CBDC) in a phased manner for wholesale and retail segments as announced in the Union Budget 2022-23.

Background

The fintech companies are transforming the very definition of banking and finance with their role played in the digital segment.
The contribution of fintech in digital payment can also be observed by usage of prepaid payment instruments.
The revolution which the QR code brought along and the interoperability put the banking on the fingertip phase.
Fintech has already made a mark in the digital payment space with the invention of UPI (Unified Payments Interface) in the country.
India's UPI transaction has seen participation of 323 banks and has recorded 5.9 billion monthly transactions worth over $130 billion.

What is Financial Technology (Fintech)?

Financial technology (better known as Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. ???
At its core, fintech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.

What is CBCD?

CBDC is a digital or virtual currency but it is not comparable with private virtual currencies or crypto currency.
Private virtual currencies do not represent any person's debt or liabilities as there is no issuer.
The CBDC will be a sovereign-backed digital currency.
The introduction of CBDC was announced in the Union Budget 2022-23, by Finance Minister Nirmala Sitharaman.
It was enacted by the amendments to the relevant section of the RBI Act, 1934 with the passage of the Finance Bill 2022.
The passage of the bill has enabled the RBI to issuance of CBDC.

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About the Finance Bill 2022

The Minister of Finance presented the Union Budget 2022-23.
With this Budget, India has marked the 75 years of Independence through Azadi ka Amrit Mahotsav.
Apart from this, the budget also lays down a plan for next 25 years and refers to the same period as Amrit Kaal.
It has also announced some important measures for taxpayers.
Digital Rupee: Introduction of Digital Rupee by the Reserve Bank of India starting 2022-23.

Role of RBI

The CBDC will be held in a digital wallet that is supervised by the Central bank.
In India, RBI supervises the digital rupee although it may delegate some power to banks.
RBI’s digital rupee will not directly replace demand deposits held in banks. Physical cash will continue to be used by banks, and people who wish to withdraw cash from banks can still do so.
But they can also opt to convert their bank deposits into the new digital rupee.

Recent developments in the field of Digital Currencies

The Reserve Bank issued guidelines regulations for emerging areas such as payment banks in 2014,
Account aggregator in 2016,
Pre-paid instruments in 2017 and Peer-to-peer lending;
Invoice discounting 2018.
They facilitated the industry in digital and for facilitating on-boarding of consumers, individuals as well as KYC documentation.