What is a CBDC?
CBDCs or Central Bank Digital Currencies are a new form of digital currency that is backed by a central bank. CBDCs are issued and controlled by central banks, therefore being subject to governmental regulation and scrutiny, unlike decentralized cryptocurrencies like Bitcoin. As central banks globally assess the possible advantages and disadvantages of developing a digital version of their national currency, the idea of CBDCs has received a lot of interest recently, India is no exception. The Reserve Bank of India (RBI) has been exploring the possibility of launching its own digital currency since 2018. In January 2021, the RBI announced that it was working towards a phased implementation strategy for a CBDC, with a pilot project in the works.
RBI’s vision on promoting CBDC
The RBI's vision for CBDC in India is to provide a digital version of the Indian rupee that is safe, secure, and accessible to all. The RBI believes that a CBDC could help reduce the cost of printing and distributing physical currency, as well as promote financial inclusion by enabling the unbanked and underbanked populations to access digital payments.
RBI has already rolled out a pilot in the retail version of the CBDC (e₹-R), on December 01, 2022. The e₹-R is in the form of a digital token that represents legal tender. It is being issued in the same denominations as the paper currency and coins. It is being distributed through financial intermediaries, i.e., the banks. Users will be able to transact with e₹- R through a digital wallet offered by the participating banks. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). The e₹-R offers features of physical cash like trust, safety and settlement finality. Like cash, the CBDC will not earn any interest and can be converted to other forms of money, like deposits with banks.
Benefits of CBDC
CBDCs could be more secure than cash, as they would be built on blockchain technology, which is highly secure and resistant to tampering. CBDCs could also be more efficient than cash, as they could be transacted instantly and without the need for physical currency.
The RBI has stated that its CBDC will be designed with features such as offline transactions, low transaction fees, and the ability to operate without internet access. The RBI has also indicated that its CBDC will be designed to coexist with existing forms of currency, such as cash and bank deposits.
The launch of a CBDC in India could have significant benefits, including reducing the cost of printing and distributing physical currency, promoting financial inclusion, and reducing the cost and time required to process digital transactions.
Problems that CBDC might cause
One concern is that a CBDC could potentially undermine financial stability if it is not implemented carefully. If people were to switch from traditional bank deposits to a CBDC, it could lead to a reduction in bank deposits, which could weaken banks' ability to lend money and create credit. As a digital currency, a CBDC could potentially be tracked and monitored in ways that cash cannot. This could be seen as a violation of privacy, and some people may be hesitant to use a CBDC for this reason.
Source: Moneycontrol and Economic Times
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