Central Bank Digital Currency

JUL 23

Preliminary   > 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.

Benefits:

  • 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.

PRACTICE QUESTION

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

Answer