CBDC is the legal tender of a country and it is issued by the Central Bank. It is an electronic record or digital token of the official currency issued by the Monetary Authority of the country.
RBI Digital currency: Presenting the budget for the year 2022, Finance Minister Nirmala Sitharaman announced that the Reserve Bank (RBI) will launch a digital rupee in the next financial year. This will be the Central Bank Digital Currency ie CBDC. In such a situation, there is a question in the mind of many people that what is this CBDC and how will it work. CBDC is actually a digital currency issued by RBI. In simple words, CBDC is the legal tender of a country as it is issued in digital form by the Central Bank. It is an electronic record or digital token of official currency issued by the Monetary Authority of a country.
A survey conducted by the Bank of International Settlements (BIS) in 2021 showed that 86 percent of central banks are set to adopt CBDCs. At the same time, about 15 percent of the countries are going to start a pilot project with this. A CBDC is a currency issued by a central bank, but it is not paper (or polymer). Prime Minister Narendra Modi had also said that the CBDC launched by RBI will be like India’s fiat currency – Indian National Rupee (INR) and can be exchanged with physical currency. According to the RBI website, it is sovereign currency in an electronic form and will appear as a liability (currency in circulation) on the balance sheet of the central bank.
Why is CBDC needed?
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. The Central Monetary Authority will have 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 currency cannot be burned or damaged, so once issued, it will always be there.
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What are the benefits of CBDC
The CBDC will be the final payment and will eliminate the risk of settlement in the financial system, especially banks. CBDC will be the actual store of value and will transfer the value from one entity to another. This will reduce the transaction cost and ease the flow of money. Real time transactions and a globalized cost effective payment settlement system will be promoted through CBDC. For example, it allows Indian importers to pay for US goods exported in real time in digital dollars without any middlemen. In this it will also not be necessary that the US Federal Reserve system is open for settlement. Time zone difference in currency settlement will no longer have any effect. This transaction will be final.
According to a note issued by the State Bank of India (SBI), CBDC will help in liquidity, acceptance, ease of transaction and faster settlement as compared to the existing form of money. This could be a practical shift towards cashless economy in the near future. Adopting a CBDC will make it easier for people to access the supporting infrastructure provided by the government. This will help the government to move towards digital economy.
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What is the situation in other countries
The CBDC or Digital Rupee is expected to be launched in India in the financial year 2022-23. It is planned to launch in two versions – Retail Digital Rupee and Wholesale Digital Rupee. Globally, Nigeria is ready to launch its own digital currency named Naira. Venezuela is also planning to launch its own CBDC, ie Digital Bolivar. South Korea is piloting the digital yuan. The European Central Bank (ECB), the US, Russia, China and Turkey are also considering their plans for CBDCs.
(By Kunal Jagdale, Founder, BitsAir Exchange)
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