Central Bank Digital Currency (CBDC): RBI 

Central Bank Digital Currency (CBDC): RBI 

Part of: GS Prelims and GS – III – Economy

In news The Reserve Bank of India is likely to soon start pilot projects to assess the viability of using digital currency to make wholesale and retail payments.

• The projects shall help adjust RBI’s strategy for introducing a full-scale central bank digital currency (CBDC).
• A high-level inter-ministerial committee set up by the Finance Ministry had recommended the introduction of a CBDC with changes in the legal framework including the RBI Act, which currently empowers the RBI to regulate issuance of bank notes.

What is The Central Bank Digital Currency (CBDC)?

• It is a legal tender and liability of a nation’s central bank in the digital form. 
• It is denominated in a sovereign currency and appears on the balance sheet of a nation’s central bank.  
• CBDC is a digital currency which can be converted/exchanged at par with similarly denominated cash and traditional central bank deposits of a nation. 
• At present, central banks of various nations are currently examining the positive implications that a digital currency contributes to financial inclusion, economic growth,  technology, innovation and increased transaction efficiencies. 

What are the Benefits of CBDC?

• Alternative to physical cash
• Instantaneous process: Transacting with CBDC would be an instantaneous process. The need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another. 
• Reduces cost of currency management: India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC. Large cash usage can be replaced by CBDC. Also, the cost of printing, transporting and storing paper currency can be substantially reduced.
• Need of the hour: If the private currencies gain recognition, national currencies with limited convertibility are likely to come under some kind of threat. CBDCs thus become the need of the hour.
• Volatility: CBDCs, being the legal tender by Central Bank, will not witness any volatility as in the case of cryptocurrencies. 
• Easy tracking of currency: With the introduction of CBDC in a nation, its central bank would be able to keep a track of the exact location of every unit of the currency. 
• Curbing Crime: Criminal activities can be easily spotted and ended such as terror funding, money laundering, and so forth
• Scope in Trade:  Foreign trade transactions could be speeded up between countries adopting a CBDC.

What is the difference between CBDCs and cryptocurrency?

• Cryptocurrencies, such as Bitcoin, are digital tokens created by a distributed network or blockchain using cryptographic tools. CBDC are legal tenders by Central Bank.
• While cryptocurrencies are decentralized, CBDCs are centralized
• Cryptocurrencies offer anonymity, CBDCs would allow central banks to know exactly who holds what. 
• CBDCs are also not stablecoins, which are a form of cryptocurrency that is pegged to another asset, for example, Tether. A CBDC would not be pegged to any fiat currency; it would be the fiat currency. A CBDC version of a dollar would be the same as a dollar bill.

News Source: TH