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What is Central Bank Digital Currency by RBI

Indian Finance Minister announced about Digital Rupee in Indian Union Budget 2022. We all heard that RBI will launch new digital currency in FY 2022-2023. It will be based on Blockchain Technology.

I am going to try to explain it in laymen term.
  • What is Digital Currency?
  • What are the type of currency legally we have?
  • Now How this digital rupee could be different from other currency?
  • What is a Blockchain Technology?
  • How Digital Indian Rupee will be different from Bitcoin?

What is Digital Currency?

Digital currency is something which is not existing physically in world. I mean to say it doesn't have existence like notes or coins, which we see for regular legal tenders.

What are the type of currency legally we have?

We have coins, currency notes and digital mode of payment like UPI, and also money transfer modes like IMPS, NEFT etc.
Digital Rupees

Now How this digital rupee could be different from other currency?

Digital Rupees will be regulated by Central authority RBI and it will be based on Blockchain Technology. There will be enhanced security on it because of blockchain Technology. RBI is yet to name it. Until it has not come in market, we could not say about the mode of it's use.
It would be pretty similar to Bitcoin like cryptocurrencies but there would be central control over it.

I am sure above paragraph looks like a high level information. Let me tell you about Blockchain Technology and Cryptocurrencies, then we can reiterate out Digital Rupee concepts.

What is a Blockchain Technology?

I am going to explain you in very laymen terms. 
In general transactions, when we do IMPS then our bank deducts money and send transaction information to RBI. RBI then deduct that amount from our Banks' account which is maintained at RBI. Now RBI credits same amount to other bank, where the beneficiary have the account.

Understand it like, I have sent 10000 from my Bank SBI to my Mother, and she has account in HDFC. At RBI level, SBI and HDFC both have their account in RBI. Suppose SBI have one Lakh in total and HDFC also have one lakh in total.
Note: If you want to go in technical terms visit this link Wiki
Now when I sent ten thousand, this amount is deducted from my account which is maintained at SBI and then this information is sent to RBI and RBI deducts 10000 from One lakh present I  SBI account. Then RBI credits ten thousand to HDFC bank and in turn HDFC credits that ten thousand to my mother's account.

Overall SBI has 90 thousand fund at RBI and HDFC has One Lakh Ten thousand.
The while game is controlled and regulated by a trusted third party which is RBI.
I believe you got it. Let us understand Blockchain. 

Small small transactions are said to be blocks in Blockchain technology. Unlike IMPS, these transaction is not controlled or regulated by any 3rd party. I will not tell you about block, nodes, miners etc. I will keep it simple. Suppose we have to send 100 cryptocurrency to someone. We will create one transactions. It will go to more than one database, where our account information is already stored. They all are stored in a computer network. Once all the database verifies and approves the transaction request, it goes to the person, to whom we have sent. There is no RBI like body in between, there are no banks in between.
How Share market works, the same way it will work. Therefore we can do trading on cryptocurrencies. 
The first Cryptocurrency 'Bitcoin' had value of 0.006 USD in 2008 and now it has value of 30 Lakhs in INR. This way value could change.

How Digital Indian Rupee will be different from Bitcoin?

Where Bitcoin does not have any central body to regulate, Digital Indian Rupee will be regulated and controlled by RBI. It will be work on Blockchain technology so because of encryption over every transaction blocks, security will be higher. No need to carry physical currency. The major interesting points would be whether we will be able to trade on digital rupee? How it would look like, what would be its name? We will see once it is announced by RBI. Definitely the management of currency would be much much easier and safer now onward, people will not be able to store it physically. 

I hope you would have understood something, comment below to let me know if we need correction somewhere or need to add something more.

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