Byline: Hannah Parker

Central banks worldwide are looking into new ways to issue digital currency, also known as central bank digital currencies (CBDCs). The Bank for International Settlements (BIS) surveyed 66 central banks in January 2020 and discovered that 80% were developing CBDCs.

While the reasons for developing digital currencies vary by country, many central banks believe that these digital assets have the potential to improve payment efficiency and security (both locally and cross-border), as well as financial stability. Banks are attempting to become more cost-effective to better serve their customers, particularly during economic uncertainty or crisis.

And so, the Reserve Bank of India (RBI) has launched the digital rupee as the first pilot of its Central Bank Digital Currency (CBDC).

Growing Use Cases of Digital Currencies

China began testing e-CNY in several cities, including Beijing, Shanghai, and Shenzhen, in April 2021. In April 2022, the bank expanded the pilot project to include six cities in eastern Zhejiang province (including Hangzhou, which will host the Asian Games in 2023), Tianjin, Chongqing, Guangzhou, Fuzhou, and Xiamen. The move attempts to fortify China’s digital currency system before the country’s digital yuan is widely adopted.

Taiwan began investigating the feasibility of developing its CBDC in September 2020, and the CBT collaborated with at least five Taiwanese commercial banks to build a retail payment system. The CBT announced in late June that the second stage of its pilot program had been completed, three months ahead of the expected deadline in September. Aside from ensuring a stable payment system and establishing the legal framework for the operation of the digital new Taiwan dollar operation, one of the most important upcoming tasks will be communicating with the public and gaining their support, as Taiwanese people are accustomed to using cash in day-to-day living.

The European Commission announced in February 2022 that a digital euro bill would be released early next year. The Bill, according to EU Financial Services Commissioner Mairead McGuinness, allows the European Central Bank (ECB) to begin technical procedures for creating a virtual version of a Euro banknote or coin. The ECB is already testing digital euro designs and systems, with a prototype due by the end of 2023. If Eurozone governors believe it is “worth the trouble,” the digital euro could be ready by 2025.

The public consultation on the digital euro’s development concluded in June 2022, and it collected ideas on “the ease of use, availability, fees, standards, and holdings caps required to safeguard financial stability.” According to the consultation, residents of the European Union, tourists, and trade partners should be able to use the digital euro.

Why the Digital Rupee is Good

Following the RBI’s announcement yesterday that the pilot of the digital rupee will begin on November 1st 2022, nine banks have been identified as assisting with the launch, including India’s largest bank, State Bank of India.

According to reports by Bitcoin 360 AI, The digital rupee pilot use case will be used to settle secondary market transactions in government securities, with the central bank’s goal of making the country’s “interbank market more efficient.”

Aside from the benefits of the digital rupee’s role in the interbank market, the RBI stated that the digital currency would help reduce transaction costs.

The pilot is also supported by the Bank of Baroda, Union Bank of India, HDFC Bank, and HSBC, in addition to the State Bank of India.

The digital rupee was proposed in February 2021 during an annual budget speech by India’s Finance Minister, Nirmala Sitharaman, to give the country’s digital economy a “big boost.”

CBDCs have been considered by many of the world’s largest economies. Recently, the United Kingdom agreed on new guidelines regarding stablecoins, which could lead to a potential digital pound due to stablecoins’ tethering to existing fiat currencies.

Sitharaman also stated in February that India intends to implement a 30% income tax on digital assets, though it is unclear if this will apply to the digital rupee. According to a statement from the RBI, the CBDC pilot program is expected to begin in select locations within the last quarter of 2022.

Before the pilot launch, the Indian national bank outlined and considered the benefits and drawbacks of a CBDC and worked on strategies to phase in the digital rupee.

Digital currency has the potential to alter how society views money entirely. The rise of Bitcoin (BTC), Ethereum (ETH), and thousands of other cryptocurrencies that only exist in digital form has prompted global central banks to investigate how national currencies might function. There is a lot to be done, and industry input is required, but the investment could be well worth it. As more countries enter the cryptocurrency race, we’ve seen that no one knows who will come out on top in 2022. One thing is sure, however: the global financial landscape is changing, and digital currencies are here to stay.