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Central Bank Digital Currency (CBDC) UPSC NOTE

 Central Bank Digital Currency (CBDC)

  • CBDC is a digital version of fiat money that can be exchanged using blockchain-backed wallets and is governed by the central bank. 

  • It is digitally issued legal tender by a central bank.

  • Government-issued currency known as "fiat money" is backed by a physical good like gold. 

    • Because they can manage the amount of money printed, central banks with fiat money have more control over the economy.

  • CBDCs are distinct from decentralised virtual currencies and crypto assets, which are not issued by the government and lack the status of "legal tender," even though the idea behind them was directly influenced by bitcoin.

Need of CBDC

  • Reducing Abuse: The anarchic nature of existing cryptocurrencies, in which their creation and maintenance are left to the public, makes a sovereign digital currency necessary.

  • The central bank can prevent their misdeeds by regulating digital currency.

  • Taking care of Volatility: Since cryptocurrencies aren't linked to any kind of asset or currency, their value is solely determined by speculative activity (demand and supply).

  • As a result, the value of cryptocurrencies like bitcoin has fluctuated greatly.

  • Digital Currency Proxy War: As the US and China compete to dominate other markets by introducing cutting-edge financial products, India runs the risk of getting into the whirlwind of a proxy digital currency war.

  • Lessening Dependence on Dollar: The Digital Rupee offers India the chance to solidify the dominance of the Digital Rupee as a superior currency for trade with its strategic partners, thereby lessening dependence on the Dollar.

  • Private Currency: If these private currencies become well-known, national currencies with limited convertibility could potentially face danger.

Significance

  • It would enable real-time payments devoid of inter-bank settlement while lowering the cost of currency management.

  • Another advantage of CBDC is that it can significantly reduce the cost of printing, transporting, and storing paper currency. This is because of India's relatively high currency-to-GDP ratio.

  • Additionally, it will lessen the harm caused to the general public by the use of private virtual currencies.

  • It will give the user the ability to carry out domestic and international transactions without the aid of a third party or bank.

  • Less reliance on cash, higher seigniorage because of lower transaction costs, and decreased settlement risk.

  • Additionally, it might result in a more reliable, effective, dependable, regulated, and legal tender-based payment option.

Issues

  • The scope of CBDCs, the underlying technology, the validation mechanism, and distribution architecture are some of the major issues under RBI's scrutiny.

  • Additionally, since the Reserve Bank of India Act's current provisions were written with physical currency in mind, legal changes would be required.

  • The Coinage Act, Foreign Exchange Management Act (FEMA), and Information Technology Act would also need to undergo consequential changes.

  • Another issue to be concerned about is the sudden flight of money from a bank under pressure.

Recently in news

  • High cost, low speed, limited access and insufficient transparency remained key challenges to existing cross-border payments, and that adoption of the Central Bank Digital Currencies (CBDCs) can make such payments efficient.

  • Faster, cheaper, more transparent, and more inclusive cross-border payment services would deliver widespread benefits to people

  • With its instant settlement feature, CBDCs can play an important role in making cross-border payments cheaper, faster and more secure.

  • He added that the use of local currencies in cross-border payments could help to shield emerging market currencies from global shocks, protect against exchange rate fluctuations and encourage the development of local forex and capital markets.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Central Bank Digital Currency (CBDC) UPSC NOTE
Central Bank Digital Currency (CBDC) UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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