Central Bank Digital Currency (CBDC)

In News

• Recently, the RBI has announced the launch of India’s Central Bank Digital Currency (CBDC) from December 1.

What is Central Bank Digital Currency (CBDC)? 

• It is the legal tender issued by a central bank in a digital form. 
• It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. 
  • Only its form is different.
• It will be an electronic version of cash.
• It will be primarily meant for retail transactions. 
• It will be potentially available for use by all which includes the private sector, non-financial consumers and businesses.
• It will be able to provide access to safe money for payment and settlement.
• It will be the direct liability of the central bank.

Who can use the retail CBDC?

• It is the first phase of a pilot project that will cover select locations and banks in a closed user group (CUG) comprising participating customers and merchants.
• It will initially cover the four cities of:
  • Mumbai
  • New Delhi
  • Bengaluru
  • Bhubaneswar.
• Four banks will be involved in the controlled launch of the digital currency in these four cities: 
  • State Bank of India
  • ICICI Bank
  • Yes Bank
  • IDFC First Bank.
• The service will be subsequently extended to the cities: Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.
  • Four more banks: Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank will join the project later. 

How will the retail digital rupee work?

• It will be issued in the same denominations as paper currency and coins and will be distributed through banks.
• Users will be able to transact through a digital wallet which would be stored on mobile phones and devices.
• Transactions can be both:
  • Person to person (P2P)
  • Person to merchant (P2M).
• Payments to merchants can be made using QR codes displayed at merchant locations.
• It will not earn any interest and can be converted to other forms of money like deposits with banks. 
• RBI has demarcated the digital rupee into two broad categories:
  • General purpose (retail)
  • Wholesale
    • The RBI has already launched the digital rupee for the wholesale segment to settle secondary market transactions in government securities.
    • Wholesale CBDC is designed for restricted access to select financial institutions. 
    • It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market more efficiently and securely in terms of operational costs, use of collateral and liquidity management.

Challenges

• 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 (Crypto jacking). 
• Shield to Crime:  If not regulated and monitored properly, it can be used for illicit trading, criminal activities, & organised crimes. 
• Popularity of Cryptocurrencies: RBI has repeatedly flagged concerns over money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc.

Advantages

• It aims at reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency and innovation in the payments system.
• It will add efficiency to the settlement system and boost innovation in cross-border payments space.
• It will provide the public with the uses that any private virtual currencies can provide without any associated risks.
• It will curb issues such as money laundering, terror financing, tax evasion, etc.  

Source: IE