December 1, 2021 - 11:31 am

RBI To Include Digital Currency 

The RBI has been examining use cases and working out a phased implementation strategy for introduction of a Central Bank Digital Currency (CBDC) with little or no disruption having received a proposal from RBI for the amendment to the Reserve Bank of India Act 1934 to enhance the scope of the definition of 'back note' to include currency in digital. The move comes amid the government's plan to introduce a bill on crypto currencies in the current Parliament session that seeks to prohibit "all private crypto currencies in India" with "certain exceptions".

                   The CBDC is a digital form of fiat currency which can be transacted using wallets backed by blockchain and is regulated by the central bank. It will be indistinguishable from fiat currency in circulation and tradable on a one-to-one basis. However, a CBDC is not to be confused with crypto currencies like Bitcoin for Ethereum in that a CBDC's value will be controlled by the central bank's sovereign reserves. Virtual currencies do not have any intrinsic value and their markets are often prone to extreme volatility. A CBDC, on the other hand will function as a stable coin alternative to fiat currency.

                  India is certainly not the first country to consider rolling out a CBDC. One of the justifications for a CBDC is that it will improve financial inclusion in the country. CBDC may allow India's large unbanked population to make digital transactions even if they don't have a private bank account. It may also curb illegal activity like money laundering and fraud. Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, high seignior age due to lower transaction costs, reduced settlement risk. Introduction of CBDC would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are also associated risks which need to be carefully evaluated against the potential benefits. Increased CBDC adoption for payments and transactions will allow a regulator to better track the circulation of money.

                  Roughly 86% of central banks worldwide were looking into issuing CBDC while 60% were experimenting with the block chain technology behind it. 14% had already or were in the process of launching pilot projects, according to a survey conducted by the Bank for International Settlements. Developing the CBDC takes time and requires a central bank to get a specific technical regulations. Other countries like Russia, the UK, Canada and Spain among several other major economies have also confirmed they are evaluating plans to issue their own digital currencies. The majority of countries have, in fact, followed China's lead in this regard where the digital Yuan has already been rolled out in certain cities.