Central bank digital currency (CBDC)

Last contribution by Khyati Srivastava on 14 Sep 2022

The Reserve bank of India plans to introduce the Central bank digital currency in a phased manner this year. This faqtsheet talks about its benefits and importance.

Updated on : 2022-09-14 09:08:50

Khyati Srivastava

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What is Central bank digital currency (CBDC)?

Central bank digital currency (CBDC) is a digital version of fiat money that can be... Read More

Central bank digital currency (CBDC) is a digital version of fiat money that can be exchanged using blockchain-backed wallets and is monitored by the central bank. Unlike cryptocurrency, It is legal tender, digitally issued by a central bank.

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What amendments are being made to introduce CBDC?

The Reserve Bank of India (RBI) seeks to amend the Reserve Bank of India Act,... Read More

The Reserve Bank of India (RBI) seeks to amend the Reserve Bank of India Act, 1934, in order to introduce a Central Bank Digital Currency (CBDC) and expand the meaning of the banknote to encompass money in digital form.

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What is fiat money?

Fiat money is the currency issued by the government which is not backed by a... Read More

Fiat money is the currency issued by the government which is not backed by a physical commodity like gold. Fiat currency allows central banks to have more power over the economy since they may regulate the amount of money that is printed.

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Why is the CBDC being introduced?

The need for CBDC arises due to the following reasons: The unstructured nature of existing... Read More

The need for CBDC arises due to the following reasons:

  • The unstructured nature of existing cryptocurrencies, in which their development and upkeep are left to the public, creates a demand for a sovereign digital currency. The central bank can prevent these abuses by regulating the digital currency.
  • CBDC offers India the chance to solidify the supremacy of the Digital Rupee as a superior currency for trade with its strategic partners, hence lessening dependence on the Dollar.
  • Since cryptocurrencies aren't linked to any kind of asset or money, their value is completely determined by market volatility (demand and supply). As a result, the value of cryptocurrencies like bitcoin has fluctuated greatly.
  • If these private currencies become well-known, national currencies with restricted convertibility could potentially face danger.
  • As the US and China compete to dominate other markets by offering cutting-edge financial products, India stands the risk of becoming sucked into the vortex of a proxy digital currency war. A sovereign Digital Rupee is now more necessary than ever to fight off the inevitable proxy war that jeopardises our financial and national security.
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What will be the benefits of CBDC?

The benefits of CBDC are: It can significantly lower the cost of printing, transporting, and... Read More

The benefits of CBDC are:

  • It can significantly lower the cost of printing, transporting, and keeping paper currency. This is because of India's relatively high currency-to-GDP ratio.
  • It will lessen the harm caused to the general public by the use of private virtual currency.
  • It would enable real-time payments devoid of inter-bank settlement while lowering the cost of currency administration.
  • It will give the user the ability to carry out domestic and international transactions without the aid of a third party or bank.
  • It would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.
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How will RBI introduce digital currency?

On February 1st, 2022, Union Finance Minister Nirmala Sitharaman formally introduced the CBDC Project. According... Read More

On February 1st, 2022, Union Finance Minister Nirmala Sitharaman formally introduced the CBDC Project. According to RBI, the CBDC will be introduced gradually, first only being accessible to wholesale and retail enterprises. There is no room for user anonymity with the Digital Rupee due to its design. In order to implement it, some key amendments need to be made to the Reserve Bank of India Act, 1934

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What are the key problems?

The key problems are: The scope of CBDCs, the underlying technology, the validation procedure, and... Read More

The key problems are: The scope of CBDCs, the underlying technology, the validation procedure, and distribution architecture are some of the major problems under RBI's scrutiny. Since the Reserve Bank of India Act's current provisions were written with physical currency in mind, legal modifications would be required. The Coinage Act, Foreign Exchange Management Act (FEMA), and Information Technology Act would also need to undergo substantial changes. Another issue to be concerned about is the sudden departure of money from a bank under pressure.

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