A central bank digital currency (CBDC) is a digital version of a country’s fiat currency that is regulated by the respective central bank. In recent years, there has been an increase in global interest in CBDCs as a means of payment and settlement. The Bank for International Settlements defines a CBDC as “a central bank liability that provides the public with electronic access to central bank money.”
There are two types of CBDCs: wholesale and retail.
Wholesale CBDCs are intended for use by financial institutions and other market participants for settlements between themselves.
Retail CBDCs, on the other hand, are designed for use by the general public for everyday transactions.
The benefits of CBDC include increased efficiency and transparency in payments and settlements, as well as improved access to financial services.
Digital Rupee :
The Central Bank Digital Currency of the Reserve Bank of India can be referred to as the electronic form of the rupee i.e The Digital Rupee, and is exchangeable one-to-one at par with the fiat currency. It will be similar to other CBDCs that are being developed by central banks around the world, such as the “Sand Dollar” in the Bahamas and the “e-krona” in Sweden . The Sand Dollar was issued by the Central Bank of the Bahamas in October 2020 and was the first nationwide CBDC in the world while China was the world’s first major economy to pilot a digital currency in April 2020. 105 countries, representing over 95 percent of global GDP, are exploring a CBDC and 10 countries have fully launched a digital currency whereas 19 of the G20 countries are exploring a CBDC, with 16 already in the development or pilot stage and have made significant progress lately.
The Reserve Bank of India (RBI) on October 7, 2022 released a concept note on India’s Central Bank Digital Currency (CBDC). RBI will soon begin the pilot launch of the digital rupee for specific use cases. The concept note explains the objectives, choices, benefits, and risks of issuing a CBDC in India.The aim is to have a more efficient way of conducting monetary policy and to reduce the cost of printing and circulating physical currency.
How is Digital Rupee different from Cryptocurrency:
A cryptocurrency is a type of decentralized digital asset and a medium of exchange based on a blockchain. However, it has mostly been controversial because of its decentralized nature, which means that transactions are handled by either party without the help of financial institutions such as banks, governments, or corporations. As a result, cryptocurrency is not subject to government or business manipulation. The digital rupee however will be a legal tender issued by the Reserve Bank of India and will, therefore, be backed by the government. CBDC provides customers with a secure digital currency that will provide them legitimate benefits while avoiding the threats related to dealing in private cryptocurrencies. According to the Reserve Bank of India, a CBDC will be a centralized digital currency issued by the central bank. It will not be a cryptocurrency as it will have all the characteristics of fiat money.
Benefits of CBDC:
CBDC has the potential to revolutionize the way we use money and make transactions. RBI has continuously reported money laundering, terror financing, tax evasion, and many more problems with private cryptocurrencies like Bitcoin, Ether, etc. CBDC is regarded as a secure alternative to private virtual currencies. It will make transactions faster and more efficient and will help reduce costs associated with traditional banking methods. CBDC could help expand financial inclusion by giving everyone access to banking services.CBDC will help increase transparency and reduce corruption in the banking system and it will also increase competition between banks and may improve the services they offer.
Concerns around CBDC:
While CBDCs have been in development for several years, they have yet to be fully implemented anywhere in the world.
CBDCs could offer a number of benefits over traditional fiat currencies, including improved speed and efficiency of financial transactions, increased security, and greater inclusion of underserved populations in the financial system. However, CBDCs also come with a number of risks and challenges, which need to be carefully considered before any decision is made to launch a national CBDC.
Some of the key concerns around CBDCs include their potential impact on monetary policy, financial stability, and privacy. CBDC could lead to even more cyber threats and privacy concerns. Lack of digital literacy is also a concern, as the majority of the population is not digitally literate and they will find it difficult to protect themselves from cybercrime. Additionally, there are significant technical challenges associated with designing and implementing a CBDC, which need to be addressed before any launch can take place.
Obviously, there are inherent risks, but overall these risks must be weighed against the desired benefits. The banking information in the centralized database is high-risk, and robust security precautions will be required to stop it from being found by cybercriminals. The financial services collected by the government in digital currency transactions will be sensitive in nature, and it will be necessary to carefully think about the regulatory structure for optimal design. This will require close interaction between the banking and data protection regulators. The Reserve Bank of India would endeavor to uphold its leadership status in payment systems, as we intend to move toward the implementation of our banking reforms.
The RBI’s enthusiasm for blockchain technology is well-founded and RBI’s Central Bank Digital Currency (CBDC) is a good idea in theory, but there are many practical problems that need to be addressed before it can be implemented. The most important of these is the issue of scalability; the RBI will need to find a way to ensure that the CBDC can handle large volumes of transactions without becoming bogged down. Additionally, the RBI will need to develop a clear policy on how the CBDC will interact with other existing digital currencies, such as Bitcoin. Until these and other issues are addressed, the CBDC remains nothing more than an interesting concept.