Central Bank Digital Currency (CBDC

In News

• Recent Report informs that the Reserve Bank of India’s (RBI) digital rupee — the Central Bank Digital Currency (CBDC) — may be introduced in phases beginning with wholesale businesses in the current financial year.

Key Points

• In the Budgetary Speech it was stated that the central bank would launch the CBDC in the financial year 2022-23. 
• RBI’s stand: It has repeatedly voiced its opposition to private digital currencies, and had proposed to the government to widen the scope of the paper rupee to include currency in a digital form.
• RBI had proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a CBDC. 
  • Government received a proposal from the RBI in October 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form. 
  • RBI has been examining use cases and working out a phased implementation strategy for introduction of CBDC with little or no disruption
• Government’s Plan: The government had been planning at the time to introduce a Bill in Parliament that would prohibit all private cryptocurrencies in India with certain exceptions.

Central Bank Digital Currency (CBDC)

• Definition:
  • CBDC is a legal tender issued by a central bank in a digital form. 
  • It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. 
  • Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralized virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status. 
• Features: 
  • The underlying technology, form and use of a CBDC can be molded for specific requirements. 
  • It is similar to a fiat currency issued in paper and is interchangeable with any other fiat currency i.e., CBDCs should be exchangeable at par with cash.
  • The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
  • CBDCs enable the user to conduct both domestic and cross-border transactions which do not require a third party or a bank.
• Launch: 
  • The Reserve Bank of India will launch the CBDC from the upcoming financial year. 
  • This follows the government’s plans to launch the CBDC that will be backed by blockchain technology.
• Government’s intention:
  • The announcement expresses the government’s intention on cryptocurrencies and other virtual currencies. 
  • The RBI has on several occasions flagged concerns of money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc and had planned to announce its own CBDC.
• Global presence of sovereign digital currencies:
  • Till December 2021, there are 87 countries (representing over 90% of global GDP) exploring a CBDC, compared to only 35 countries who were considering a CBDC in May 2020. 
  • Out of these, 9 countries (Bahamas, 7 eastern Caribbean & Nigeria) have now fully launched a digital currency. 
  • Nigeria is the latest country to launch a CBDC, the e-Naira, the first outside the Caribbean. 
  • However, the major countries with the 4 largest central banks (the US, the Euro Area, Japan, and the UK), are furthest behind.
  • There are 14 countries, including China and South Korea, who are now in the pilot stage with their CBDCs and preparing a possible full launch soon.

Significance

• It will give a big boost to the digital economy and India would be the first major country to officially launch its currency in such a manner.
• A digital rupee transaction would be instantaneous as opposed to the current digital payment experience.
• More robust, efficient, trusted, regulated and legal tender-based payments option.
• More accessible to the people just as UPI made digital cash easier to use. 
• Reduced dependency on cash.
• Reduced settlement risk. 
• Higher seigniorage due to lower transaction costs, 
• Usage of the Digital Rupee could also benefit things like cross-border remittances

Challenges

• Price Volatility:  Prone to price fluctuations & waste of computing power.
• Lack of Consumer Protection: No Dispute Settlement Mechanisms and control of Securities and Exchange Board of India (SEBI). 
• Digital Illiteracy: The population of India is currently not equipped to deal with cryptos.
• Security Risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
• Shield to Crime:  If not regulated and monitored properly, it can be used for illicit trading, criminal activities, & organized crimes. 
• Popularity of Cryptocurrencies: RBI has repeatedly flagged concerns over money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc. 

Way Ahead

• The Reserve Bank of India (RBI) should leverage the existing infrastructure through NPCI for a faster introduction and adoption of digital rupee across the economy through QR code system.

• Introducing its own CBDC has been seen as a way to bridge the advantages and risks of digital currency.
• A formal announcement by the RBI is awaited which will detail on how the Digital Rupee will be transacted by citizens. 

Source: IE