Digital Currency Plans of RBI

In News :

Recently , The Reserve Bank of India has released a Concept Note on Central Bank Digital Currency (CBDC) for India.

Rationale behind it 

•  The purpose behind the issue of this Concept Note is to create awareness about CBDCs in general and the planned features of the Digital Rupee (e?), in particular. It explains the objectives, choices, benefits, and risks of issuing a CBDC in India. 
• It also seeks to explain Reserve Bank’s approach towards introduction of the CBDC.

About Central Bank Digital Currency (CBDC)

• Background : In the Budget presented for 2022-23, the Finance Minister had announced the introduction of India’s Central Bank Digital Currency (CBDC) and that the digital rupee would give a ‘big boost’ to the digital economy. 
  • The Reserve Bank had, in July 2021, indicated that it would soon begin work on the ‘phased implementation’ of the CBDC.
• Meaning : It is a digital form of currency notes issued by a central bank .
  • The Reserve Bank defines CBDC as the legal tender issued by a central bank in a digital form. It is the same as a sovereign currency and is exchangeable one-to-one at par (1:1) with the fiat currency.
  • In India, it will be the RBI that supervises the digital rupee although it may delegate some power to banks
• Features :  It is sovereign currency issued by Central Banks in alignment with their monetary policy.
  • It appears as a liability on the central bank’s balance sheet
  • Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
  • Freely convertible against commercial bank money and cash
  • Fungible legal tender for which holders need not have a bank account
  • Expected to lower the cost of issuance of money and transactions.

Why are central banks issuing digital currencies?

• The rationale for issuing a digital currency ranges from accelerating the pace of financial inclusion and digitisation in the economy, enhancing the efficiency of the payment systems, lowering the costs associated with physical cash management, and ensuring financial stability given the proliferation of crypto currencies. 
•  Central bank digital currencies are promised as reliable, sovereign-backed alternatives to private currencies which are volatile and unregulated. 
• Unlike physical cash, which is hard to trace, a digital currency that is monitored by the RBI can be more easily tracked and controlled by the Central bank. 
• CBDC can provide significant gains in remittances. 
  • It is possible that CBDCs will lower the costs and friction associated with international remittances. 

 Risks in adopting digital currencies

• Cyber hacks and threats: A CBDC might be subjected to cyber hacks, which might lead to server blockages or unforced timeouts or service declines.
• Threat to privacy: The introduction of CBDC will increase the security and safety of transactions as all of them will be validated and captured in a distributed ledger
• Impact on monetary policy: The high adoption of CBDC within a country’s financial system could have an impact on the monetary policy, creating unnecessary instability in the economy without proper measures.
• Impact on the role of commercial banks: Many, including various central bankers, fear that people may begin withdrawing money from their bank accounts as digital currencies issued by Central banks become more popular.
  • This concern was flagged by the RBI Deputy Governor as well. 
  • The outflow of such deposits would be harmful for commercial banks as they would need an alternative source to fund the lending business, thus decreasing the ability of banks to give loans to the public.
• Impact on financial inclusion: There are a plethora of reasons for exclusion to occur in the case of something like a CBDC. These can range from economic factors, lack of knowledge, propensity of people in tier-2 or tier-3 cities to use cash, and unawareness of the existence of CBDC in some markets.

What lies ahead?

• The RBI begins to firm up its views on the form and functionality of the CBDC and it has stated that it will launch pilots to examine the specific use cases of the CDBC.
• However, the RBI will have to make several design choices to determine the form of the digital currency.
• To build a CBDC ecosystem and make it sustainable, it is essential to address all existing issues and for CBDC to act as a tool for inclusion by solving the problems through innovation.
• There is also a need for strong cooperation between government agencies and regulatory bodies so that a balance is maintained and a proper data or information collection framework is implemented that oversees the ecosystem.