What is the Central Bank Digital Currency?

With digitalisation, businesses and consumers are embracing digital forms of financial transactions faster than anybody could have expected. Cryptocurrency and other digital currencies are the recent fads across the world. India, like other countries, also followed suit and is planning to launch its own digital rupee, which mirrors the prevalent physical currency in the digital form.

The Central Bank Digital Currency (CBDC), backed by blockchain technology, will be launched by the Reserve Bank of India. However, according to the Deputy Governor of the Reserve Bank of India, the introduction of India’s first digital currency requires a nuanced and calibrated approach since it will have several consequences for the economy and monetary policy. Aspirants who are preparing for the bank examination can visit the link to find RBI Governor’s List, who have served so far.

The Reserve Bank of India (RBI) recently suggested revisions to the Reserve Bank of India Act, 1934, that would allow it to issue a Central Bank Digital Cash (CBDC), broadening the meaning of ‘banknote’ to encompass currency in digital form. In this article, we will discuss in brief the pros and cons of the CBDC.

Digital Rupee- India’s Own Digital Currency

CBDC is a digital form of fiat currency that can be traded using blockchain-backed wallets and is governed by the central bank. It is a digital type of legal money issued by a central bank. Although the concept of CBDCs was directly inspired by bitcoin, it differs from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the status of ‘legal tender’.

The Reserve Bank of India (RBI) will launch a digital currency called the digital rupee, which would enable consumers to transfer purchasing power from bank accounts into smartphone wallets in the form of online tokens, which, like currency, will be a Reserve Bank of India’s liability. A digital rupee will be similar to banknotes but without ATMs.

Significance of digital currency

  • It would lower the cost of currency maintenance while enabling real-time payments without the need for inter-bank settlement.
  • It will also reduce the negative impacts caused by the use of private virtual currency on the general population.
  • It has the potential to bring considerable advantages, such as decreased reliance on currency, increased seigniorage due to lower transaction costs, and lower settlement risk.
  • Another advantage of CBDC is that it may replace enormous amounts of cash, lowering the expense of printing, transporting, and keeping paper money.
  • It may also result in a more robust, efficient, reliable, regulated, and legal tender-based payment method.
  • It has the potential to do away with the requirement for a costly network of correspondent banks to settle cross-border payments. For e.g., sending money home will become easier and cheaper for Indians working overseas, resulting in significant savings for India, the world’s top recipient of remittances.
  • It will allow the user to execute domestic and cross-border transactions without the need for a third party or a bank.

Issues related to the digital currency

  • Legal amendments will be required because the present rules in the Reserve Bank of India Act were designed with physical currency in mind. Amendments to the Coinage Act, Foreign Exchange Management Act (FEMA), and Information Technology Act would also be necessary.
  • The RBI is looking into many critical concerns, including the scope of CBDCs, the underlying technology, the validation procedure, and distribution architecture.
  • If e-cash becomes mainstream and the RBI does not impose any limits on the amount that may be saved in mobile wallets, weaker banks may struggle to maintain low-cost deposits.
  • If these small banks lose their buffer, lenders may be hesitant to sell their loan assets and forgo revenues. Their less liquid balance sheets may make companies vulnerable to bank runs.
  • All economies are concerned about the danger to financial stability, and advanced economies are likewise concerned about the diminishing usage of banknotes, especially after COVID-19.

With the growing influence of digital currency, the usage of physical currency and different types of cheques are seeing a downtrend. Many countries have accepted digital currency as a legal tender. El Salvador is the first country to recognise bitcoin as a legal tender, and the Bahamas, other countries like China and Japan are expected to come up with their own digital currency.

Also read: What is the monthly turnover of the forex market?

With the use of paper currency declining, there is a need to promote electronic currency systems. This becomes more efficient in countries where the actual currency is widely used, such as India. However, it is critical to implement such a critical choice in a well-planned and well-evaluated manner since haste execution may result in more losses than profits.