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THE DIGITAL RUPEE
What the article is about?
- Talks about the budget proposal of digital currency and associated pros and cons.
Syllabus: GS-III Indian Economy, Monetary Policy, Banking Sector
Central Bank Digital Currency(CBDC):
- CBDC is a digital form of Fiat Currency that can be transacted using wallets backed by the blockchain and is regulated by the central bank.
- It is a legal tender issued by a central bank in digital form.
- In 2020, the central bank of Bahamas issued a CBDC.
- CBDC’s gained traction with:
- the rapid surge of cryptocurrencies,
- the increasing popularity of blockchain technology,
- the benefits that many argue stem from its adoption.
Benefits:
- Acceleration of financial inclusion
- Lower the cost for financial transactions; especially in case of cross-border transactions
- It would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
- Large cash usage can be replaced by CBDC; the cost of printing, transporting and storing paper currency can be substantially reduced.
- Advantages of an alternate payment system
- The creation of another instrument in the monetary policy arsenal of central banks
- The likely adverse impacts on corruption and money laundering.
Concerns:
- Retails CBDC accounts are interest-bearing, implications for the banking system
- During periods of extreme uncertainty, depositors may choose to migrate away from commercial banks, causing financial upheaval.
- Some key issues under RBI's examination include the scope of CBDCs, the underlying technology, the validation mechanism and distribution architecture.
- Also, legal changes would be necessary as the current provisions have been made keeping in mind currency in a physical form under the Reserve Bank of India Act.
- Consequential amendments would also be required in the Coinage Act, Foreign Exchange Management Act (FEMA) and Information Technology Act.
Way Ahead:
- While some benefits may accuse at the wholesale level, the real transformation and the challenges as well lie at the retail level.
- Considering the wider economic implications, the central bank must carefully weigh the pros and cons.
