RBI plans digital currency pilots soon

RBI plans digital currency pilots soon

Subject : Economics

Context : RBI Deputy Governor has stated that the Reserve Bank of India may soon conduct pilot projects to assess the viability of using digital currency to make wholesale and retail payments to help calibrate its strategy for introducing a full-scale central bank digital currency (CBDC).

Concept :

Central bank digital currency (CBDC):

• A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). Hence they are also sometimes referred to as digital fiat currencies or digital base money.
• A CBDC is essentially a legal tender issued by the central bank. It has the same functional capabilities as a fiat currency and is considered exchangeable in nature with said fiat currency in a one-to-one form. The only notable difference is the form it takes, i.e., a digital form.
• CBDC would coexist with cash and existing digital payment methods.
• The present concept of CBDCs was directly inspired by Bitcoin, but a CBDC is different from virtual currency and cryptocurrency, which are not issued by a state and lack the legal tender status declared by the government. A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
• The growing popularity of cryptocurrencies like Bitcoin and Ethereum poses a possible threat to the traditional banking system. Also, cryptocurrencies are associated with a lot of concerns.