Samajho's Android app | Samajho's IOS app | Youtube Channel | Telegram Channel | Instagram Channel
CRYPTOS AND A CBDC ARE NOT THE SAME THING
What the article is about?
- Talks about the clarity required in differentiating cryptos and CBDC.
Syllabus: GS-III Indian Economy
Cryptos and CBDC:
- Recently, in its Budget 2022-23, the Government of India announced that its central bank will issue a digital currency as early as 2022-23.
- A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region).
- The Reserve Bank of India (RBI) will issue the digital currency in the next fiscal which will be called Digital Rupee.
- The digital rupee will allow users to transfer purchasing power from deposit accounts into smartphone wallets in the form of online tokens, which like cash will be a liability of the Reserve Bank of India.
- A digital rupee will be like banknotes, minus ATMs.
- Cryptocurrency is any type of digital or virtual currency that uses encryption to safeguard transactions.
- Cryptocurrencies don't have a central issuing or regulating authority, depending instead on a decentralised system to log transactions and produce new units.
- Cryptocurrencies like Bitcoin and others are stored on a decentralised blockchain network, and transactions can be conducted, authenticated, and recorded in the public ledger sans any third-party interference.
Need for a CBDC:
- CBDC aims to bring in the best of both worlds – the convenience and security of digital forms like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system.
- As purchases go online, the basis of trust in demand deposits, that they convert to cash at face value, may get reduced to a theoretical construct.
- The digital rupee will allow users to transfer purchasing power from deposit accounts into smartphone wallets in the form of online tokens, which like cash will be a liability of the Reserve Bank of India.
Concerns associated with a CBDC:
- If e-cash becomes popular and RBI places no limit on the amount that can be stored in mobile wallets, weaker banks may struggle to retain low-cost deposits.
- Even as these small banks lose that cushion, lenders may be reluctant to shed their loan assets and sacrifice profits.
- CBDCs at present cannot be a substitute for cryptos that will soon begin to be used as money.
- This will impact the functioning of central banks and commercial banks.
