Central Bank Digital Currency (CBDC)
Why is CBDC in the news?
The finance ministry announced that the Reserve Bank of India's (RBI) digital rupee Central Bank Digital Currency (CBDC) — may be introduced in different phases in the current financial year itself.
In the budget speech of February 1, Finance Minister Smt. Nirmala Sitharaman had stated that RBI would launch the digital currency CBDC in the current financial year 2022-23. RBI also expressed its opposition against private digital currencies and proposed to the government in October last financial year to enlarge the scope of the paper rupee to be made in a digital form.
This is a very important article for candidates who are attempting the WBCS Exam or any other government exam in West Bengal.
What is Central Bank Digital Currency (CBDC)?
CBDC is an electronic currency — a digital form of the physical paper currency. It is much more secure and less volatile than cryptocurrency like bitcoin, but it does not have crypto's decentralised benefits.
According to the Reserve Bank of India, "Central Bank Digital Currency is the legal tender issued by RBI in a digital form. It is very much similar to the fiat currency and exchangeable with the fiat currency. The CBDC or digital fiat currency can be transacted using digital wallets supported by blockchain technology. But the form of these currencies is different."
The idea of CBDCs was inspired by a cryptocurrency called Bitcoin; it has some differences from other cryptocurrencies and assets, which are not issued by the country, so it has no 'legal tender status. CBDC helps the user to conduct both regional and international transactions which are not financial mediators or banks.
How will CBDC help the customers?
Minister of State for Finance; Pankaj Chaudhary said last year, "Introduction of Central Bank Digital Currency has the significant potential to provide financial benefits, such as lower cash dependency, lower transaction costs, low risk of settlement. The introduction of CBDC would also lead to a more efficient, robust, trusted, regulated and legal tender-based payment system."
He also stated, "There are also some risks associated with CBDC against the potential benefits." Minister announced that the RBI had proposed some amendments to the RBI Act, 1934, which will help to launch CBDC. The central government had planned to introduce a Parliament Bill prohibiting "all private cryptocurrencies in India" with "some exceptions".
"The Central Government has received a financial proposal from the RBI in October 2021 for the amendment to the RBI Act, 1934 to enlarge the scope of the definition of 'bank currency' in digital form. RBI has started to check the working and implementation strategy for the introduction of CBDC."
RBI alerted the issues like money laundering, terror financing, tax evasion, etc., associated with private cryptocurrencies like Ruble, Libra, Bitcoin, Ether, etc. CBDC has its advantages and risks with digital currency.
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What will the introduction of the CBDC change for citizens?
There are different models proposed by technology experts and engineers on how the CBDC could be transacted. One major difference could be that CBDC transactions would be instantaneous instead of the current digital payment experience. The formal announcement of the RBI will likely provide all the details regarding this.
Benefits of CBDC
The major benefits of CBDC are:
- Reduced using cost
- Security – offers higher levels of security in transactions against fraud
- Stricter rules
- Privacy – protecting users' data.
Due to the benefits of CBDC, 10 countries have officially launched CBDC, while China's pilot plans to launch CBDC in 2023. Meanwhile, 105 countries representing over 95 per cent of developed global GDP are currently starting to research CBDC.
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