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Central Bank Digital Currency

Context:

According to the recent reports the Reserve Bank of India’s (RBI) digital rupee — the Central Bank Digital Currency (CBDC) — may be introduced in phases beginning with wholesale businesses in the current financial year.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. About Central Bank Digital Currency (CBDC)
  2. Why are central banks issuing digital currencies?
  3. What will the introduction of the digital rupee change for citizens?

About Central Bank Digital Currency (CBDC):

  • 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. Only its form is different.
  • The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
    • Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
  • CBDCs enable the user to conduct both domestic and cross-border transactions which do not require a third party or a bank.

How will CBDC help?

  • Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk.
  • Introduction of CBDC would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.
  • RBI had proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a CBDC.
  • RBI has repeatedly flagged concerns over money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc. Introducing its own CBDC has been seen as a way to bridge the advantages and risks of digital currency.

Why are central banks issuing digital currencies?

  • To bring down the use of physical cash.
  • The cost of issuing digital currencies is far lower than the cost of printing and distributing physical cash.
  • The RBI can create and distribute the digital rupee at virtually zero cost since the creation and the distribution of the digital rupee will happen electronically.
  • Unlike physical cash, which is hard to trace, a digital currency that is monitored by the RBI can be more easily tracked and controlled by the Central bank.
  • Central bank digital currencies are promised as reliable, sovereign-backed alternatives to private currencies which are volatile and unregulated.
  • This feature of digital currencies, however, has raised various concerns regarding their privacy and could slow down their adoption.
  • In fact, it is worth noting that the need for privacy has been one of the primary reasons behind the switch to private digital currencies.

What will the introduction of the digital rupee change for citizens?

  • There are several models proposed by technology experts and evangelists on how the digital rupee could be transacted, and the formal announcement by the RBI will likely provide the details.
  • One chief difference could be that a digital rupee transaction would be instantaneous as opposed to the current digital payment experience.

-Source: Indian Express


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