Syllabus: GS3/ Economy
In News
- Recently, the US President through its executive order banned the creation and use of Central Bank Digital Currency (CBDC) and emphasizes the development of dollar-backed stablecoins, a private-sector alternative to CBDCs.
Why has the US banned CBDC?
- Privacy Concerns: CBDCs could enable government surveillance over individual transactions.
- Financial Sovereignty: Avoids centralization of the financial system under the federal government.
- Support for Decentralization: Promotes innovation in private-sector digital assets like stablecoins.
What is CBDC?
- Definition: CBDC refers to the digital form of a nation’s sovereign currency, issued and regulated by its central bank. Unlike cryptocurrencies, which are decentralized, CBDCs are centrally managed and backed by the government.
- Types of CBDCs:
- Wholesale CBDCs: Designed for institutional use, facilitating large-scale transactions such as interbank transfers, cross-border payments, and securities settlements.
- Retail CBDCs: Intended for everyday use by individuals and businesses. For example: Token-based (accessed with private and public keys) & Account-based ( requires digital identification).
- Features of CBDCs:
- Legal Tender: Recognized as a medium of payment and store of value by all citizens, businesses, and government agencies.
- Liability: Represents a direct liability of the central bank, unlike deposits with commercial banks.
Benefits of CBDC
- Lower Transaction Costs: Reduces costs associated with cash handling and traditional banking systems.
- Transparency: Tracks transactions to reduce corruption, money laundering, and tax evasion.
- Crisis Resilience: Serves as a reliable payment method during natural disasters or pandemics.
- Global Trade Efficiency: Simplifies cross-border payments and reduces intermediaries.
- Eco-Friendly: Eliminates the need for physical cash, reducing environmental impact.
- Safe and Stable: Government-backed and regulated, offering a secure alternative to volatile cryptocurrencies.
- Reduced Banking Risks: Prevents panic withdrawals during crises and enhances security.
India’s CBDC: E-Rupee
- Launch of e-Rupee: Introduced by the Reserve Bank of India (RBI) in 2022.
- Usage: Facilitated through e₹ wallets offered by banks and non-banks.
- Supports person-to-person (P2P) and person-to-merchant (P2M) transactions.
- Rationale for e-Rupee
- Digital Transformation: Aims to modernize the monetary system and reduce dependence on physical cash.
- Cost Reduction: Minimizes the costs of cash handling and issuance.
- Global Competitiveness: Aligns with global trends in digital finance to enhance economic inclusion.
Source: LM
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