Donald Trump Bans CBDC in US

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