Introduction of Central Bank Digital Currency

In News

Recently, the Reserve Bank of India (RBI) has been working on the phased introduction of the Central Bank Digital Currency (CBDC ).

About Central Bank Digital Currency

• It is a legal tender and a central bank liability in digital form denominated in a sovereign currency and appearing on the central bank’s balance sheet.
• It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
• It can be converted or exchanged at par with similarly denominated cash and traditional central bank deposits.

Present Status in India

• India is already a leader in digital payments, but cash remains dominant for small-value transactions.
• In February 2020 RBI bulletin, citing a survey of central banks conducted by the Bank for International Settlements had said some 80 per cent of the 66 responding central banks have started projects to explore the use of CBDC in some form.
  • These central banks are contemplating and studying the potential benefits and implications of CBDC in the economy. 

• 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 the issuance of banknotes.

Benefits 

• It would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
  • Foreign trade transactions could be speeded up between countries adopting a CBDC.
• India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC as to the extent large cash usage can be replaced by CBDC.
• The cost of printing, transporting and storing paper currency can be substantially reduced.

• They could enable a cheaper and more real-time globalisation of payment systems.
  • It is conceivable for an Indian exporter to be paid on a real-time basis without any intermediary.
  • The risks of dollar-rupee transactions, the time zone difference in such transactions would virtually disappear.
• The adoption of CBDCs can also have important implications for the banking system.
  • CBDCs can cause a reduction in the transaction demand for bank deposits and will reduce the intra-day liquidity for settlement of transactions. 
    • They could also cause a shift away from bank deposits.

Issues in Implementation 

• Key issues under examination by the RBI relate to the scope of CBDCs.
  • Whether they should be used in retail payments or also in wholesale payment.
  • Whether it should be a distributed ledger or a centralised ledger, for instance, and whether the choice of technology should vary according to use cases.
• Validation mechanism 
  • Whether token-based or account-based distribution architecture 
  • Whether direct issuance by the RBI or through banks, degree of anonymity etc. are also being examined.

Way Forward 

• The introduction of CBDC has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk.
• It would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.
• There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits.
• It would be the RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems.

Source: TH