The digital rupee in India and cryptocurrencies that are traded on public blockchains and exchanges are often discussed in the one breath; as being part of the same financial revolution that is bringing about digital money. But, in reality, they are two very different approaches to money, financial infrastructure and settlement.
The Reserve Bank of India’s central bank digital currency (CBDC), the so-called digital rupee, is a representation of the sovereign currency of India in digital form; decentralised crypto coins function under entirely different rules and do not have the backing of the Indian government.
The distinction between these different forms of digital currency will become increasingly important as India continues to expand its digital financial ecosystem. Exchanges like Binance often list the prices of currency pairs like USDT INR and other crypto or stablecoin-to-fiat currency prices, and India has a very high percentage of crypto adoption.
But there is a big difference between a dollar-pegged stablecoin, the digital rupee and decentralized cryptocurrencies, and they should not be treated interchangeably. They each have different risks associated with them, depend on a different form of trust and address a different problem.
What Makes India’s Digital Rupee Different From Cryptocurrency?
The CBDC, India’s digital rupee or e₹ as it is commonly called, is a digital currency issued by the Reserve Bank of India (RBI). It isn’t a bank deposit, where a customer has a claim on a bank; rather, a retail CBDC is a liability of the central bank. It is a digital form of sovereign money, and is designed to be used alongside its physical equivalent, not in any way to replace the rupee with a token issued privately.
The retail and wholesale pilots for the CBDC were launched by the RBI in December of 2022, and it has plans to continue those pilots, including expanding their use into new areas, throughout 2027.
The retail pilot is designed to explore how the CBDC can be used for smaller digital payments between individuals and merchants, while the wholesale pilot is more focused on how settlement between financial institutions could occur when the CBDC is used.
The digital rupee is issued by the RBI, and its monetary value is tied directly to the RBI, rather than relying on some cryptoasset’s market price.
Regardless of what sort of technology is used to transfer or distribute it, it is not a decentralized cryptocurrency in any way. The main point of the CBDC is for the RBI to explore the use of central bank money in an economy that is becoming increasingly digital.
How Do Stablecoins Differ From the Digital Rupee?
Stablecoins are digital tokens that are privately issued; they are set to maintain a stable value against another asset, which at present is most commonly the US dollar. They are then used in cryptocurrency markets for transferring value and trading without the need to consistently convert cryptocurrency back into conventional currency.
The Bank for International Settlements has stated that stablecoins do confer a limitation that central bank money does not have; they do not provide any assurance of convertibility. The reliability of stablecoins is dependent on the quality of their reserves, the issuer’s ability to meet obligations and what their redemption arrangements are.
Any token designed to track the dollar, or any other fiat currency, is in no way the same as holding money in a bank account, nor holding the CBDC. They do have a much more stable value than other cryptocurrencies, but share some of their risks around regulation and liquidity.
What Makes Decentralized Cryptocurrencies Different From Stablecoins and the Digital Rupee?
Cryptocurrencies like Bitcoin have no connection to any central banks of fiat currencies. They operate according to protocols in a network, and their market prices are driven by speculation, market news and market sentiment.
They provide access to a network without the need for a central issuer approving transactions; while this can be advantageous, it does introduce a variety of other risks. Cryptocurrencies come with concerns about wallet security, network fees, price volatility and the irreversibility of transfers. Even when everything is working as intended, they might not deliver what users are looking for.
What Do These Differences Mean for India’s Financial System?
India must assess each of these different financial tools against the intended use that they have, and keep them legally separate, rather than tarring them all with the same brush. They can each serve functions and have uses, but they are relatively distinct, and each brings its own set of unique concerns when discussed from a regulatory standpoint.
The digital rupee should be approached with considerations of monetary policy, financial inclusion, payment infrastructure and privacy in mind. Stablecoins require users to consider reserve management, redemption, cross-border financial activity and private issuance. And cryptocurrencies should raise questions of custody, investor protection and market integrity.
It is important to note that when money is represented as a token, that act alone is not equal to resolving differences in consumer protections or legal status.
Author: Liam Clarke
Liam is a content writer from Australia. He has been writing content for years and has a flexible style that allows him to write content to suit many topics. When he isn’t writing content, he’s watching classic films and providing enrichment for his cat.
