Central Bank Digital Currency
Economic Development > Indian Economy and Issues > Digital technology
Why in news?
- RBI is in the process of implementing the CBDC in a phased manner for wholesale and retail segments.
About Central Bank Digital Currency:
- A Central Bank Digital Currency (CBDC), or national digital currency, is simply the digital form of a country’s fiat currency.
- Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the government.
- CBDC is not comparable with private virtual currencies or cryptocurrencies.
It will be a sovereign-backed digital currency.
Recent steps towards CBDC:
- The introduction of CBDC was announced in the Union Budget 2022-23.
- Government amended section of the RBI Act, 1934 through the Finance Bill 2022.
- India’s official digital currency is likely to debut by early 2023
Challenges in rolling out National Digital Currency:
- Potential cyber-security threat.
- Lack of digital literacy of the population.
- Issue with regulation, tracking investment and purchase, taxing individuals, etc.
- Threat to Privacy: The digital currency must collect certain basic information about an individual so that the person can prove that he’s the holder of that digital currency.
- For social benefits and other targeted payments in a country
- CBDCs could be used for faster cross-border remittance payments.
- Inclusive development: universal access attributes of a CBDC could also include an offline payment functionality, thus helping bridge the digital divide.
- Instant lending to micro, small, and medium enterprises (MSMEs) in India can be possible with the help of CBDC.
Need for CBDC:
- An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
- India has a high currency-to-GDP ratio. It adds to the cost of printing, transporting and storing paper currency.
Consider the following statements:
1. India is the first country to issue sovereign-backed digital currency
2. Successful implementation of a sovereign-backed digital currency will increase cost of currency management
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2