Last week, we reported that India’s central bank, Reserve Bank of India (RBI), has formed a new unit to supervise and oversee its efforts in emerging technologies including cryptocurrency, blockchain and Artificial Intelligence (AI). Now in a latest development to this, RBI has constituted an inter-departmental panel to study the desirability and feasibility of launching its own Fiat-currency. The proposed Digital or Virtual Currency (VC) will be Rupee-based which could eventually replace paper or metal-based currency currently in circulation, said the RBI’s Annual Report 2017-18.
“In India, an inter-departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency,” said RBI in the report.
To recall, exactly a year back, RBI was contemplating to launch cryptocurrency called ‘Lakshmi’, which was the result of examination done by group of experts at RBI for the possibility of cryptocurrency which would become an alternative to the Indian rupee for digital transactions, and unlike bitcoin which is a non-fiat digital currency, Lakshmi would be fiat-cryptocurrency. ‘Fiat currency’ means a currency that is forced into circulation by a government.
In the latest Annual report of RBI, the central bank cited increasing costs of managing paper or metallic currency as a reason for looking to introduce a digital currency. According to a report by India Today, the total cost of printing paper-based currency/notes in India stood at Rs 636 crore in FY’2017-18. It also cited rapid changes in the payments industry, along with the emergence of private digital tokens like Bitcoin, as factors for considering to launch a central bank backed digital currency.
The RBI report said, “Rapid changes in the landscape of the payments industry, along with factors such as emergence of private digital tokens and the rising costs of managing fiat paper/metallic money, have led central banks around the world to explore the option of introducing fiat digital currencies.”
Since the increase in popularity of virtual currency like Bitcoin in India, RBI is being very vocal about “Fiat Money”. Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity like gold or petrol, which is in the case of Fiat Currency like Rupee.
The U.S. dollar is considered to be both fiat money and legal tender. Legal tender is any currency that a government declares to be legal. Many governments issue a fiat currency, then make it legal tender by setting it as the standard for debt repayment.
U.S dollars are now backed by the U.S. government — making it fiat money — and, as legal tender, is accepted for both private and public debts.
In October last year, Dubai unveiled its very first official state cryptocurrency called ’emCash’. emCash was developed in partnership between UK-based blockchain startup Object Tech and Emcredit, a subsidiary of Dubai Economy.
Fiat money serves as a good currency if it can handle the roles that an economy needs of its monetary unit: storing value, providing a numerical account and facilitating exchange.
For the uninitiated, Bitcoin is the first, and currently the biggest digital currency- a decentralised tradable digital asset. The best part about the currency is that it is almost impossible to trace a bitcoin transaction back to a physical person. This particular feature makes it a hit among the dark world as it offers them an anonymity that no other currency in the world provides.
Last year, Jamie Dimon, the head of JP Morgan, the leading global financial services firm and one of the largest banking institutions in the United States, had completely dissed the currency saying that Bitcoin is actually a fraud that will ultimately blow up.