Central Bank Digital Currency

News: Finance Minister Nirmala Sitharaman has announced the launch of the Digital Rupee — a central bank digital currency (CBDC) — 2022-23 onwards. The Reserve Bank of India will launch the CBDC from the upcoming financial year.

What is the CBDC or National Digital currency?

  • 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.
  • Four major use cases of CBDC in the Indian context:
    • ‘Fit-for-purpose’ money used for social benefits and other targeted payments in a country. For such cases, the central bank can pay intended beneficiaries pre-programmed CBDC, which could be accepted only for a specific purpose.
    • CBDCs could be used for faster cross-border remittance payments. International collaboration among the major economies of the world, including India, could help create the necessary infrastructure and arrangements for CBDC transfer and conversion.
    • Payment instruments could be made available for payment transactions to be made via CBDC. Furthermore, universal access attributes of a CBDC could also include an offline payment functionality.
    • Instant lending to micro, small, and medium enterprises (MSMEs) in India can be possible with the help of CBDC.
  • An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement. India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC — to the extent large cash usage can be replaced by CBDC, the cost of printing, transporting and storing paper currency can be substantially reduced. The need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another.

Challenges:

  • Potential cybersecurity threat.
  • Lack of digital literacy of population.
  • Introduction of digital currency also creates various associated challenges in regulation, tracking investment and purchase, taxing individuals, etc.
  • The digital currency must collect certain basic information of an individual so that the person can prove that he’s the holder of that digital currency.