Central Bank Digital Currency (CBDC)

Central Bank Digital Currency (CBDC)

Subject : Economy

Section :Monetary Policy and Banking

Context: Proposed digital currency by RBI to speed up transactions , reduce cost of cash

The Reserve Bank of India is planning to come out with a central bank-backed digital currency, using blockchain technology in 2022-23.

A Central Bank Digital Currency (CBDC), or national digital currency, is simply the digital form of a country’s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the government. CBDC is a legal tender issued by a central bank in a digital form. It is similar to a fiat currency issued in paper and is interchangeable with any other fiat currency.

Merits 

• Reduce the cost of currency management
• May reduce inflation – as a high currency to GDP ratio is inflationary (might decline unnecessary cash holdings.
• Digital Rupee transactions will be instantaneous as opposed to the current digital payment experience.
• Enabling real-time payments without any inter-bank settlement thus, reducing transaction cost and time.
• The cost of printing, transporting and storing paper currency can be substantially reduced.
• Financial inclusion.
• Better targeting of beneficiary of cash subsidy schemes
• Counter the growth of private forms of digital money.
• The state-backed digital currency can provide investor/consumer protection, the private can confidently invest in the associated infrastructure without any doubts over its regulation.
• Less volatile than other private digital currency as regulated by the RBI
• Better monetary policy transmission
• The central bank would be able to keep a track of the exact location of every unit of the currency, thereby curbing money laundering, terror financing and counterfeiting.
• Reduce dependence on dollar for international transaction

Concerns

• Digital illiteracy
• Lack of internet and smartphone penetration
• Technology related exclusion from welfare schemes
• Cyber threat
• Collect certain basic information of an individual so that the person can prove that he’s the holder of that digital currency thus privacy concerns
• Technological issues- underlying technology, the validation mechanism and distribution architecture.
• Sudden flight of money from a bank under stress is another point of concern.
• Eliminate the large infrastructure of banking and financial institutions.