[Answered] Distinguish between Digital Rupee and cryptocurrencies. What are the advantages of having own digital currency for the Indian economy?

Introduction: Write a brief note on the Digital Rupee.
Body: Write down a few differences between the digital rupee and cryptocurrency, such as legal tender, etc. Write down a few points on the advantages of digital currency for India.
Conclusion: Write down a few challenges associated with the digital rupee.

Digital Rupee is a Central Bank Digital Currency (CBDC) based on blockchain technology. It was announced during the Union budget 2022. It may seem similar to cryptocurrencies, as both are based on blockchain technology. However, there are critical differences.

Digital RupeeCryptocurrency
Will be issued centrally by the RBIDecentralized creation by private individuals and organisations.
Will be legal tender in IndiaNot legal tender in India.
It will be a fiat currency in digital form, i.e. it will be exchangeable with other fiat currencies.Not fiat currency but assets created privately to facilitate transactions.
It will have intrinsic guarantee by the RBI for payment to the holder.No such guarantee or claim.

The digital rupee can have various advantages for the Indian economy

  • It will enable the government to serve the public’s need for digital currencies, manifested in the increase of private virtual currencies, which are volatile and risky. 
  • It will allow the replacement of paper currency with a more efficient and acceptable form of currency by reducing transaction cost and settlement risk, thereby moving towards a cashless economy. 
  • It will empower the regulators to monitor transactions and credit flow across the economy, helping them weed out scams and fraud instantly and secure depositorsmoney. 
  • It will enable a more real-time and cost-effective global payment system without the role of intermediaries. 
  • It will enable better monitory policy transmission by reducing the role of banks. 
  • It will reduce the cost of printing and the circulation of paper currency. 
  • Creation of opportunities in the Fintech space, where technology companies can function as Fintech companies, thereby increasing financial inclusion. 
  • Use of blockchain in the Digital Rupee will promote innovation in the blockchain technology domain in India, which will have benefits for other sectors as well.  

However, to maximize the advantage of Digital Rupee, the associated challenges must be addressed 

  • It is a fairly new concept, its advantages and risks are not yet fully understood. 
  • Although blockchain is reliable and safe but the risk of blockchain being hacked is not completely eliminated, especially with the advent of quantum computing. Hackers can steal a huge amount of Digital rupee that can easily destabilize the economy. 
  • Limited citizen capacity and financial literacy in India create constraints for its large adoption. It also has the potential to further exclude the financially and digitally illiterate population. 
  • It does not address misuse of cryptocurrency for illegal activities, for which global concerted action is needed. 

Creation of Digital Rupee is a well-intentioned step, but it is a new and evolving concept, which will require pro-active and vigilant approach from RBI and other stake holders for its successful adoption. 

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