Context: While addressing the Kautilya Economic Conclave, Finance Minister Nirmala Sitharaman called on nations to prepare for the growing influence of stablecoins, emphasizing that ignoring this shift could risk economic exclusion in an increasingly digital world.
- A stablecoin can be described as “a crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets.” The underlying mechanics of so-called stablecoins may vary and include:
- “Asset-linked stablecoins” which “purport to maintain a stable value by referencing physical or financial assets or other crypto-assets”. Examples include Tether, USD Coin, or Euro Coin.
- “Algorithm-based stablecoins” which “purport to maintain a stable value via protocols that provide for the increase or decrease of the supply of the stablecoins in response to changes in demand. Examples include DAI, and TerraUSD.
- India has not legalised these products in terms of regulation, but it does tax transactions that involve them.
- The RBI, on the other hand, has lobbied hard to ban virtual digital assets outright, while simultaneously launching pilot projects of its own Central Bank Digital Currency (CBDC).
About Central Bank Digital Currency:
- According to the RBI, “CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
- The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
- It is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
- India has introduced the e-Rupee, a form of digital currency, through the Reserve Bank of India (RBI). The e-Rupee aims to modernize the financial infrastructure, ensure financial inclusion, and reduce transaction costs.
- Central Bank Digital Currency categorise into two types:
- Retail CBDC: Retail Central Bank Digital Currency (e₹-R) is designed for use by person-to-person payments or person-to-merchant transactions through Wallets.
- Wholesale CBDC: Wholesale Central Bank Digital Currency (e₹-W) is designed for use by financial institutions and intermediaries, primarily to streamline interbank settlements and large-value transactions.
Difference Between CBDC (Digital Rupee) and UPI
