From UPSC perspective, the following things are important :
Prelims level : Digital Rupee
Mains level : Central Bank Digital Currency (CBDC)
The Reserve Bank of India (RBI) is working toward a “phased implementation strategy” of a Central Bank Digital Currency (CBDC).
Do you know?
China’s digital RMB was the first digital currency to be issued by a major economy.
Central Bank Digital Currency (CBDC)
- The phrase CBDC has been used to refer to various proposals involving digital currency issued by a central bank.
- They are also called digital fiat currencies or digital base money.
- The present concept of CBDCs was directly inspired by Bitcoin, but a CBDC is different from virtual currency and cryptocurrency.
- Cryptocurrencies are not issued by a state and lack the legal tender status declared by the government.
Why India needs a digital rupee?
- Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
- High currency in circulation: India has a fairly high currency-to-GDP ratio.
- Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
Features of CBDC
- High-security instrument: CBDC is a high-security digital instrument; like paper banknotes, it is a means of payment, a unit of account, and a store of value.
- Uniquely identifiable: And like paper currency, each unit is uniquely identifiable to prevent counterfeit.
- Liability of central bank: It is a liability of the central bank just as physical currency is.
- Transferability: It’s a digital bearer instrument that can be stored, transferred, and transmitted by all kinds of digital payment systems and services.
Various benefits offered
- It is efficient than printing notes (cost of printing, transporting, and storing paper currency)
- It reduces the risk of transactions
- It makes tax collection transparent
- Prevents money laundering