Central Bank Digital Currency (CBDC)

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    • Recently, the RBI has announced the launch of India’s Central Bank Digital Currency (CBDC) from December 1.

    What is Central Bank Digital Currency (CBDC)? 

    • It is the legal tender issued by a central bank in a digital form. 
    • It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency
      • Only its form is different.
    • It will be an electronic version of cash.
    • It will be primarily meant for retail transactions. 
    • It will be potentially available for use by all which includes the private sector, non-financial consumers and businesses.
    • It will be able to provide access to safe money for payment and settlement.
    • It will be the direct liability of the central bank.

    Who can use the retail CBDC?

    • It is the first phase of a pilot project that will cover select locations and banks in a closed user group (CUG) comprising participating customers and merchants.
    • It will initially cover the four cities of:
      • Mumbai
      • New Delhi
      • Bengaluru
      • Bhubaneswar.
    • Four banks will be involved in the controlled launch of the digital currency in these four cities: 
      • State Bank of India
      • ICICI Bank
      • Yes Bank
      • IDFC First Bank.
    • The service will be subsequently extended to the cities: Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.
      • Four more banks: Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank will join the project later. 

    How will the retail digital rupee work?

    • It will be issued in the same denominations as paper currency and coins and will be distributed through banks.
    • Users will be able to transact through a digital wallet which would be stored on mobile phones and devices.
    • Transactions can be both:
      • Person to person (P2P)
      • Person to merchant (P2M).
    • Payments to merchants can be made using QR codes displayed at merchant locations.
    • It will not earn any interest and can be converted to other forms of money like deposits with banks
    • RBI has demarcated the digital rupee into two broad categories:
      • General purpose (retail)
      • Wholesale
        • The RBI has already launched the digital rupee for the wholesale segment to settle secondary market transactions in government securities.
        • Wholesale CBDC is designed for restricted access to select financial institutions. 
        • It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market more efficiently and securely in terms of operational costs, use of collateral and liquidity management.

    Challenges

    • Lack of Consumer Protection: No Dispute Settlement Mechanisms and control of Securities and Exchange Board of India (SEBI). 
    • Digital Illiteracy: The population of India is currently not equipped to deal with cryptos.
    • Security Risks: Cyberattacks on wallets, exchange mechanism (Crypto jacking). 
    • Shield to Crime:  If not regulated and monitored properly, it can be used for illicit trading, criminal activities, & organised crimes. 
    • Popularity of Cryptocurrencies: RBI has repeatedly flagged concerns over money laundering, terror financing, tax evasion, etc with private cryptocurrencies like Bitcoin, Ether, etc.

    Advantages

    • It aims at reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency and innovation in the payments system.
    • It will add efficiency to the settlement system and boost innovation in cross-border payments space.
    • It will provide the public with the uses that any private virtual currencies can provide without any associated risks.
    • It will curb issues such as money laundering, terror financing, tax evasion, etc.  

    Fiat Money

    • It is a government-issued currency that is not backed by a commodity such as gold.
    • It gives central banks greater control over the economy because they can control how much money is printed.
    • Most modern paper currencies such as the US dollar are fiat currencies.
    • One danger of fiat money is that governments will print too much of it, resulting in hyperinflation.

    Source: IE