News: The Reserve Bank of India (RBI) is working toward a “phased implementation strategy” of a Central Bank Digital Currency (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.
Central Bank Digital Currency (CBDC)
- The phrase CBDC has been used to refer to various proposals involving digital currency issued by a central bank. They are also called digital fiat currencies or digital base money.
- The present concept of CBDCs was directly inspired by Bitcoin, but a CBDC is different from virtual currency and cryptocurrency.
- Cryptocurrencies are not issued by a state and lack the legal tender status declared by the government.
- CBDC implementations will likely not use any sort of distributed ledger such as a blockchain.
- CBDC is a high-security digital instrument; like paper banknotes, it is a means of payment, a unit of account, and a store of value. And like paper currency, each unit is uniquely identifiable to prevent counterfeit.
- It is a liability of the central bank just as physical currency is. It’s a digital bearer instrument that can be stored, transferred, and transmitted by all kinds of digital payment systems and services.
- It 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 Central Bank Digital Currency (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.
- It will also minimize the damage to the public from the usage of private virtual currencies.
- Some key issues under RBI’s examination include, the scope of CBDCs, the underlying technology, the validation mechanism and distribution architecture.
- Also, legal changes would be necessary as the current provisions have been made keeping in mind currency in a physical form under the Reserve Bank of India Act. Consequential amendments would also be required in the Coinage Act, Foreign Exchange Management Act (FEMA) and Information Technology Act.
- Sudden flight of money from a bank under stress is another point of concern.