Central Bank Digital Currency India – CBDC || Reserve Bank of India

Read : Central Bank Digital Currency India, Hello friends, in today’s article we will give you information about CBDC. CBDC In future every citizen of India will have their own digital currency. Central Banking Digital Currency (CBDC) will work as an online virtual currency. The Reserve Bank of India (RBI) has started a pilot program of digital rupee in the wholesale segment with effect from November 1, 2022. Not many people know about this new currency. Therefore, complete information about CBDC has been given in this article. So let us know what is CBDC?

What is Central Bank Digital Currency?

In today’s time we can easily see the role of digital currency all around us. Citizens of India are now learning to earn income by learning new technologies. Experts have claimed that in future every citizen of India will have their own digital currency.

RBI CBDC: Digital Rupee pilot starts

The Reserve Bank of India (RBI) has started a pilot program of digital rupee in the wholesale segment with effect from November 1, 2022, the central bank said. The regulator has roped in 9 banks to participate in the pilot.

• State Bank of India
• Bank of Baroda
• Union Bank of India
• HDFC Bank
• ICICI Bank
• Kotak Mahindra Bank
• Yes Bank
• IDFC First Bank
• HSBC

Central Bank Digital Currency Introduction

• A CBDC is a digital form of paper currency and is legal tender issued and backed by a central bank, unlike cryptocurrencies that are not governed by any regulatory body.
• It is similar to fiat currency and is one to one exchangeable with fiat currency.
• Fiat currency is the national currency which is not pegged to the price of a commodity such as gold or silver.
• Digital fiat currency or CBDC can be transacted using wallets backed by the blockchain.
• Although the concept of CBDCs was directly inspired by bitcoin, it differs from decentralized virtual currencies and crypto assets which are not state-issued nor ‘legal tender’.

Indian Digital Currency Program

The blue print for the launch of digital currency by the end of this year has been prepared by Shri Shashikant Das, the other RBI Governor, Reserve Bank of India.

Now in our country also our Indian Digital Currency / India Digital Currency will be used like cryptocurrency. This digital currency will give impetus to the economy of our country and will make efforts to raise it. Brief information of Indian Digital Currency / Indian Digital Currency is provided through below points.

CBDC Full form – Central Banking Digital Currency

Designing of Digital Currency (CBDC) –

According to the concept note issued by RBI, now we know what can be the forms of CBDC –

Role of RBI and Private Players

There can be two models of CBDC based on public-private partnership –

1. Direct – Under this model, the central bank will be broadly responsible for all aspects related to issuance of CBDC to ensuring its accessibility to the end users.

2. Indirect/two-tier CBDC model: Where the central bank develops a core system and private players are responsible for ensuring access to the CBDC system and other value-added services to the users. Under both models, the CBDC will be the liability of the central bank.

There is a high possibility that RBI may introduce retail CBDC to the general public in the country. This will be a historic change/departure of RBI in its existing operational system. Because in the current system RBI has no direct relationship with the end consumers.

In case of direct model, RBI will be responsible for all new activities which will require new competencies within the bank. Alternatively, RBI may consider a two-tier model, where the role of RBI in operations will be less. Wherein most consumer services can be outsourced to intermediaries.

However, even under this model, the RBI will need to develop functions such as monitoring and risk management, and put in place efficient and robust systems to deal with potential CBDC disruptions.

How will CBDC work?

• Customers will not get any interest on CBDC.
• The launch of CBDC is possible only on denominated currency.
• In theory, the digital rupee can be converted into cash.
• Will be linked to the existing UPI based payment system.
• Recall feature, recovery feature in case of hack.
• The system for redressal of complaints will be strengthened.
• There should also be a limit on how many CBDCs one can hold.
• It is possible that a bank account condition may not be imposed for a CBDC.
• It is not clear whether the monetary policy will be adversely affected.
• It will be decided whether the anti-money laundering rules are followed.
• Direct, indirect model of issue is discussed.
• In direct, all the responsibility will be with the Reserve Bank.
• At the same time, banks, other institutions can also have a role in indirect.

How will CBDC help?

The introduction of a CBDC has the potential to provide significant benefits, such as less reliance on cash, higher coinage profits due to lower transaction costs, and lower settlement risk.

The introduction of a CBDC will likely pave the way for a more robust, efficient, reliable, regulated and legal currency-based payment option.

The Reserve Bank of India had proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to introduce CBDCs. The government was planning to introduce a bill in Parliament at the time that would ban “all private cryptocurrencies in India” with “few exceptions”.

The government has received a proposal from the Reserve Bank of India in October 2021 to amend the Reserve Bank of India Act, 1934 to widen the definition of ‘bank note’ to include currency in digital form.

Purpose of CBDC

CBDC has the following objectives-

Supplementary to cash – CBDC can be introduced in the country not as a substitute for cash (cash) but as a supplement. With the introduction of digital currency, dependence on cash will be reduced and the expenditure in printing currency will also be curbed. Unlike countries such as the UK and Sweden, cash is still more prevalent in India. Sweden and the UK have a cash in circulation (cash in circulation) to GDP ratio of 2.3 per cent and 3.4 per cent, respectively, compared to 12 per cent in India. For the objective to be successful, India will have to continuously evaluate cash use and payment habits of citizens after the introduction of the CBDC.

Promote financial inclusion –

India still has 190 million people who do not have bank accounts (as of 2017) due to the huge population. To an extent, CBDCs can be an option to promote financial inclusion.

Promote digitization of the economy –

The introduction of CBDCs can improve the efficiency of payment systems as well as boost competition and innovation in the sector. In the last few years in India, many steps have been taken to promote digital payments. This includes providing real-time and round-the-clock payment options to users, promoting competition through NPCI, developing a new framework for retail payments and providing low-cost payments. Here, it will be important to assess whether a retail CBDC can provide any additional benefits to the digitization of the economy and, if so, how it can fit into the existing payment system.

Restriction on Private Digital Currency –

The ability of the central bank to carry out its functions related to monetary policy and financial stability could be affected if people of the country adopt private digital currency. Which will ultimately be dangerous for the economy of the country. The central bank believes that CBDC can be helpful in reining in private digital currency.

Prevention of Financial Crime –

CBDC can improve the country’s capacity to combat financial crime such as money laundering and tax evasion. Because CBDC systems may be able to track and identify transactions. The design of a CBDC is important to accomplish this purpose, as it will allow traceability.

Improvement in cross-border payment systems –

CBDCs can also play a big role in increasing the efficiency of cross-border payment systems. In case of foreign exchange transactions in this system, there will be no delay in settlement irrespective of time zone.

Benefits of CBDC –

There are many benefits of CBDC, let’s know about its benefits –

• CBDC is a high security digital device and can be used for payment, a unit of account and store of value.
• Like paper money, each unit is uniquely identifiable to prevent counterfeit currency.
• It is the responsibility of the central bank just like physical money.
• It is a digital payment instrument that can be stored, transferred and transmitted by all types of digital payment systems and services.
• It is more efficient than printing.
• It reduces the risk of transactions.
• It makes tax collection transparent.
• Prevents money laundering.

Challenges of CBDC

Following are the challenges of CBDC –

Privacy issues –

The central bank will potentially store large amounts of data relating to user transactions that pose a risk to the individual’s privacy/privacy.

This has serious implications as transactions in digital currencies are not able to protect the level of privacy of users as compared to cash transactions.

Compromise of credit is the main issue in this.

Reduced intermediation of banks

If sufficiently large and broad-based CBDCs change, it could affect a bank’s ability to return funds in credit arbitrage.

In case e-cash becomes popular and the Reserve Bank of India (RBI) does not impose any limit on the amount that can be stored in a mobile wallet, weak banks will be able to maintain low-cost deposits as well. can struggle.

Other Risks –

Rapid obsolescence of the technology can pose a threat to the CBDCs ecosystem. The result may be incurring high cost of upgrades.

Employees will need to be retrained and prepared to function well for CBDCs as intermediaries have operational risks.

The cost of advanced cybersecurity vulnerability testing and protecting firewalls.

Operating burden and cost for the central bank in managing CBDCs.

Forms of CBDC –

CBDC can be structured as ‘token-based’ or ‘account-based’. A token-based CBDC is a bearer instrument like banknotes. Which means that whoever holds the tokens at a given point in time is considered their owner. In contrast, an account-based system requires the maintenance of records.

The balances and transactions of all holders of the CBDC indicate the ownership of and monetary. In a token-based CBDC, the person receiving the token will verify that his or her ownership of the token is genuine, whereas in an account-based CBDC, an intermediary verifies one’s identity.

Considering the features offered by both forms of CBDC, it is a token-based CBDC.

Viewed as the preferred mode for CBDC-R as it will be closer to real cash, whereas for account-based CBDC-W, CBDC may be considered.

CBDC preferred over cryptocurrency

• Cryptocurrencies pose a risk to consumers and have no sovereign guarantee and are therefore not a legal currency.
• Their speculative nature also makes them highly volatile.
• The user loses access to his cryptocurrency if he loses his private.
• In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
• Cryptocurrencies are more vulnerable to criminal activity and money laundering because they provide greater anonymity than other payment methods because the public key involved in a transaction cannot be directly linked to an individual.
• A central bank cannot regulate the supply of cryptocurrencies in the economy, which could pose a risk to a country’s financial stability if their use becomes widespread.
• Since validating the transaction is energy-intensive, it can have adverse consequences for the energy security of the country. For example, in 2018 the total electricity usage of bitcoin mining was comparable to that of medium-sized economies such as Switzerland.

Crypto currency or digital currency or virtual currency-

Cryptocurrency or Digital Currency or Virtual Currency is the same. It is simply known by different names. Cryptocurrency started with bitcoin in the year 2009. Millions of crypto coins and tokens have been launched since then.

The government of any country has no control in this. The number of crypto investors and traders is also increasing rapidly in India. Many exchanges have also started. From where you can buy and sell these crypto currencies. Although there is a lot of danger in this, but still many people have benefited from it to millions and crores of rupees.

RBI has already said that the concept of bitcoin may not be suitable for RBI, hence it is considering to bring its own digital currency CBDC. 86% of central banks in the world are conducting research on CBDCs. Of these, 60% are being used by central banks and 14% of banks have started pilot projects of CBDCs. The US has also introduced its own digital currency i.e. Tether, which is paired with the dollar.

FAQ

1.  What is the full form of CBDC?

Ans:- Its full form is Central Bank Digital Currency.

2. Is CBDC a fiat currency?

Ans:- Yes, it is a legal currency.

3. Which is the first country in the world to issue CBDC?

Ans:- Bahamas

4. Who will have the right to supervise it?

Ans:- This right will be with the Reserve Bank.

5. Can it be transferred through mobile?

Ans:- Yes

6. Is CBDC a cryptocurrency?

Ans:- No, it is not a cryptocurrency. CBDC is different from cryptocurrency.

7. Why is CBDC needed?

Ans:- The CBDC will be backed by Distributed Ledger Technology (DLT), but it will be a licensed blockchain that differentiates it from crypto assets that are not licensed, with the Central Monetary Authority having control of the blockchain. The use of paper currency is continuously decreasing, now RBI wants to make its electronic form more popular. Digital currency will be more efficient and will help in avoiding the dangers and pitfalls of private currency. Digital currencies cannot be burned or damaged, so once issued they will always be there.

Conclusion

By reading this article you must have come to know about CBDC. If you have any doubt related to this article then you can ask in comment, your doubt will be cleared.

If you liked this article then do share it with your friends so that they can know about CBDC.

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