Paper and metal printed currencies often referred to as “fiat money, is a government-issued currency that is not backed by a physical commodity, such as gold or silver”—Investopedia. Digital currency is essentially a form of intangible currency offered in digital form. It makes possible immediate transactions and ownership transfer across geographies.
The good old paper currency has been in vogue since long, with the stability of the respective governments maintaining its value. It is worth noting that it is not possible to convert these paper currencies. The central banks have also often been expressing their concern in regards to printing costs and management of paper and metal currencies.
As an alternative, of late, the Reserve Bank of India (RBI), following consultation with the Monetary Policy Committee (MPC), had expressed its intention of issuing a central bank digital currency (CBDC). For the same reason (as informed in the Reserve Bank’s Annual Report 2017-18), an interdepartmental group was formed to study and offer consultation on the requisites and viability of launching a centrally backed (fiat) digital asset. The logic, as stated by the RBI, was to control and minimise the elevating cost of printing paper (fiat) currency. Paradigm shifts experienced lately in the payments industry has directed the interests of the central banks to act proactively in this sphere. RBI opines that a (fiat backed) digital currency will, apart from minimising its bills of printing paper currency, also place the economy in a global spotlight of the digital currency world.
However, all of this is easier said than actually done. The banking watchdog realised later that the user-dependent value of cryptocurrencies and the volatile nature of it pose an imminent risk in using it as value storage or exchange medium. Entrusted with the task of ensuring enough safeguard for the investor community and protection of the consumers, RBI also acknowledged the cryptocurrency market bubble possibilities. This retreat was also an outcome of the ban on cryptocurrency exchanges in India imposed by the RBI. What followed this was the phase when the RBI totally cancelled (as reported by the Hindu Business Line) its idea to launch a CBDC.
Experts opine that RBI’s of late distrust (postponement of issuing a national cryptocurrency) for central bank digital currency also emanates from the limited comprehension of the cryptocurrency economy. For this, as suggested by industry practitioners, it is crucial to monitor the maturing sphere of the peer-to-peer economy. There is also a dire need to first prepare a comprehensively meticulous policy development framework for digital currency and blockchain technology (the facilitator of digital cryptocurrency).