![](https://www.nextias.com/ca/wp-content/uploads/2023/07/7017641Screenshot_6.png)
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.
Fiat Money
|
Source: IE
Previous article
Women in Judiciary
Next article
Indo-French Partnership on Kaziranga Project