Digital currency will lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce Digital Rupee, using blockchain, said Nirmala Sitharaman
Finance Minister Nirmala Sitharaman in her Union Budget 2022 presentation today, 1 February, announced that the Reserve Bank of India (RBI) will introduce a digital currency based on blockchain technology in the financial year 2022-23. The move is expected to boost the country’s digital economy and will help in creating a cheaper and more efficient currency management system, according to her Budget speech.
“Digital currency will lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23,” said FM Sitharaman in the Budget speech.
With the recent announcement of the digital rupee, many people may be confused about the new digital currency to be launched by the RBI. Here is an explanation for the questions surrounding the Central Bank Digital Currency (CBDC).
What is blockchain technology?
Blockchain technology is a digital ledger of transactions that is stored in a decentralised manner. Also known as Distributed Ledger Technology (DLT), blockchain is the underlying mechanism that many cryptocurrencies, including Bitcoin, operate on, reports Business Standard.
How does blockchain technology work?
Blockchain works on decentralised distribution of information. Each ‘block’ in the digital ledger contains information about transactions made. New blocks containing more information are added into the chain and bound to the previously entered data. This chain of information blocks or ‘blockchain’ is stored across several computer systems and servers.
The database is managed by the various systems (nodes) that store the block data, ensuring that the information is kept in a decentralised manner. This also ensures that the data can be viewed by anyone in the network, making the data easily available.
How is data secured on blockchain?
Each block has a unique cryptographic signature or ‘hash’ to secure the data. This makes it difficult to hack a blockchain without the cryptographic code. To hack the whole blockchain, someone would need the hash for every block, making it virtually impossible to alter or cheat the system. This makes it possible to update and safely store data across various systems.
This additional layer of security makes blockchain a secure medium for storing transaction data related to cryptocurrencies, Non-Fungible Tokens (NFTs) and so on.
Why is the announcement on digital rupee significant?
The announcement comes in the middle of a debate regarding the future of cryptocurrencies in the country. Last year, the RBI had announced concerns about the spread of private cryptocurrencies and stated that they could cause financial instability.
The government’s move towards digital currency is also seen as a way to promote digital payments and push forward its Digital India agenda, reports The Indian Express.
The RBI is expected to use blockchain technology to introduce the digital rupee as a CBDC, according to reports. This will make the currency a digital fiat currency and make it subject to regulations by the central bank. It will enable users to conduct domestic and international transactions which do not need a bank or a third party.
Countries such as Nigeria, Bahamas and some islands in the East Caribbean have already introduced CBDCs.