Central Bank Digital Currency(CBDC) |
| Credit: MARCA |
What is CBDC?
• A Central Bank Digital Currency (CBDC), or National Digital Currency or Official Digital Currency is simply the digital form of a country's fiat currency. It is an electronic record or digital token of the official currency and is issued and is regulated by its monetary authority.
• The growth of cryptocurrencies such as Bitcoin, Dogecoin, Ethereum etc. raised challenges to fiat currencies.
• The potential and vulnerabilities of these cryptocurrencies forced the central banks to explore the possibility of introducing their own digital currencies.
Benefits of CBDCs:
• A well-designed CBDC system has the potential to revolutionize the remittance industry by making it easy and simple to transfer money across borders using the rails of technology.
• CBDCs automate the process between banks through wholesale CBDCs and establish a direct connection between consumers and central banks through retail CBDCs.
• CBDCs can prevent illicit activity because they exist in a digital format and do not require serial numbers for tracking. Cryptography and a public ledger make it easy for a central bank to track money throughout its jurisdiction, thereby preventing illicit activity and illegal transactions using CBDCs.
Limitations of CBDCs:
• CBDCs do not solve the problem of centralization. A central authority, in this case a reserve bank, is still responsible for and invested with the authority to conduct transactions. Therefore, they still control data and the levers of transactions between citizens and banks.
• CBDCs have the potential to erode privacy. A centralized authority is responsible for collecting and disseminating digital identification to conduct transactions in such a system.
• The portability of CBDC systems means that a strong CBDC issued by a foreign country could end up substituting the local currency of a weaker country.
RBI's Plans on Digital Currency:
• According to Reserve Bank of India (RBI) Governor Shaktikanta Das, RBI is set to launch the trial program of its digital currency by December 2021.
• The RBI is focused on examining the potential impact of a digital rupee on India's financial sector, with issues such as monetary policy control at the top of the list.
• The RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption.
Key Takeaways
• A central bank digital currency (CBDC) is an electronic record or digital token of the official currency of a country.
• The introduction of cryptocurrencies paved the way for central bank digital currencies.
• The main advantages of CBDCs are that they promote financial inclusion and simplify the implementation of monetary and fiscal policy.
• The main disadvantages of CBDCs are that they are a centralized form of currency and can erode the privacy of citizens.
• Many countries around the world are exploring the introduction and use of CBDCs in their economy.
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