top of page

Central Bank Digital Currency

Introduction


Money is no longer paper and coins. It is becoming increasingly digital, and an increasing number of central banks are contemplating the issuing of their own digital currencies. Digital currency is simply electronic money as opposed to physical currency. Central bank Digital currencies are the digital equivalents of a nation's physical currency, such as a digital dollar, euro, pound, or rupee. The central banks issuing and managing these digital currencies are national financial authorities in charge of a country's currency, money supply, and monetary policy, such as the setting of interest rates, which affect the cost of borrowing.


CBDCs are still in their infancy, and it is unclear how far or quickly they will advance. We are aware that central banks are building the capacity to leverage new technologies in preparation for what may lie ahead.


CBDCs are distinct from cryptocurrencies (also known as cryptoassets). Cryptocurrencies are not issued by a central bank. Among these privately issued digital currencies are Bitcoin, Ether, and XRP. The value of a cryptoasset can fluctuate very rapidly. They are a risky investment, which is not the case with CBDC.



India is bracing up too


According to the RBI, “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. It is sovereign currency in an electronic form and will appear as liability (currency in circulation) on a central bank’s balance sheet. CBDCs should be exchangeable at par with cash.


A CBDC is an electronic record or digital token of a nation's official currency that serves as a medium of exchange, unit of account, store of value, and deferred payment standard.





Critical Analysis


Pros


No need for Interbank Settlement


Since payments made with CBDCs are final, the financial system's settlement risk is decreased. There won't be a requirement for interbank settlement owing to CBDC. It's comparable to a UPI system where CBDC, rather than bank balances, is transferred as if it were cash.


Real-time Globalisation of payments


CBDCs could also facilitate a more efficient and real-time globalisation of payment systems. It is possible for an Indian importer to pay its American exporter in digital dollars in real time, without the need for an intermediary. This transaction would be conclusive, as if dollars were handed over in cash, and it would not even require the US Federal Reserve system to be open for settlement. The effect of time zone difference on monetary settlements would cease to exist.


Safer and Secure


CBDC implementation has the potential to provide significant benefits, such as decreased reliance on cash, increased seigniorage as a result of lower transaction costs, and decreased settlement risk. Introduction of CBDC could also result in a more secure, trustworthy, efficient, regulated, and legal tender-based payment option. Living in the digital age has its advantages and disadvantages;  RBI has repeatedly expressed concerns regarding money laundering, financing of terrorism, tax evasion, etc. in relation to private cryptocurrencies such as Bitcoin, Ether, etc. The introduction of its own CBDC was viewed as a means of balancing the benefits and risks of digital currency.


Hurdles


Digital Penetration and Technology Readiness


Integration of CBDCs into the economy is also dependent on technological readiness. The creation of a population-scale digital currency system is dependant on the evolution of high-speed internet and telecommunication networks, as well as the dissemination of technology suitable for storing and transacting in CBDCs. Being a developing country with vast inequalities, financial penetration let alone digital one is a task.


Legal impediments


Although CBDCs are theoretically identical to banknotes, the introduction of CBDC would necessitate a new legal framework, as the current legal rules are based on paper currency. The RBI Act of 1934 must be revised. Certainly, there are related hazards, but they must be carefully weighed against the potential advantages. As we progress in the direction of India's CBDC, the RBI will endeavour to take the required steps to reinforce India's leading position in payment systems.



Conclusion


CBDCs are expected to be included in the line - up of all future central banks. Implementing this will necessitate careful calibration and a nuanced approach. It is imperative to process with caution without making haste, drawing board considerations and stakeholder discussions. Technological obstacles have their own significance. As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is nigh.

Komentarze


bottom of page