Blockchain Technology: Prospects and Challenges

[op-ed snap] Should the RBI issue a digital currency?

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Blockchain technology(read the attached story).

Mains level: Need of a government backed cryptocurrency in India.


News

Context

  1. The Reserve Bank of India (RBI), like many of its global peers, has decided to look into the possibility of issuing a central bank digital currency (CBDC)
  2. However, it It is not obvious yet why the government would launch digital currencies that would make online transactions untrackable

What is a digital currency?

  1. Currency is a subset of a broader economic concept of money
  2. Currency is the “token” which facilitates movement of money, shifting its purchasing power from the current holder to its future holder
  3. Currency has evolved into several forms; from good old cash/coins, to electronic money and, more recently, cryptocurrency
  4. Electronic money represents electronic payments facilitated by banks and payment networks
  5. It lacks physical existence and peer-to-peer exchange being trackable by authorities, thus not being anonymous

Edge over other payment methods

  1. Cryptocurrency addresses the need to enable peer-to-peer anonymous transactions on the lines of cash
  2. However, cryptocurrency provides this anonymity in online/electronic transactions which credit card/debit card/internet banking-based payments cannot

Why do we need a cryptocurrency backed by the government?

  1. Cryptocurrencies have limited social acceptance since they are neither issued by central banks nor are they a liability for anyone—even private entities, forget governments
  2. And thus comes the demand for digital currency which is expected to have the anonymity feature of cash but can be used in electronic transactions, while being backed by government

What societal need will digital currency solve?

  1. Modern fiat money, and by extension currency, is a social contract as much as a legal contract
  2. The success of any mode of payment, or a new currency, depends on wider acceptance by citizens and governments
  3. If society is comfortable with the idea that all electronic payments are trackable by authorities, prima facie, there will be limited demand for cryptocurrencies (this is different from the demand for “investment” purposes)
  4. The limited anonymous peer-to-peer transaction can be done with cash. It is not yet clear how society sees this issue

The way forward

  1. It is reasonable to expect that the technology will evolve to address the operational inefficiencies in the long term
  2. Societies and governments must decide if they should be adopting digital currency or central bank cryptocurrency just because technology can enable it
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