Central Bank Digital Currency

Recently the deputy governor of Reserve Bank of India T. Rabi Shankar said that the RBI is currently working on a phased implementation strategy for its own digital currency, Central Bank Digital Currency (CBDC), and will launch it in the wholesale and retail segments soon.
The primary idea for the RBI is to protect consumers from the appalling level of volatility seen in some or many of the virtual currencies that have no sovereign backing.

The central bank digital currency should not be mistaken with a cryptocurrency or Bitcoin.
A CBDC is a central bank issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset.
This guarantee from a central bank reduces the CBDC risk, volatility, and ensures a larger acceptance across the globe.
On the other hand, a cryptocurrency is issued by a network and backed by a crypto asset which may or may not have the backing of any monetizable asset or physical asset. Therefore, the risk is higher and there is more price volatility and less acceptance as a money instrument globally.

- Experts point out that the move to bring out a CBDC could significantly improve monetary policy development in India with enhanced surveillance and real-time situational monitoring.
- A CBDC can increase the transmission of money from central banks to commercial banks and end customers much faster than the present system.
- Digital fiat currencies create greater barriers to illicit activity, as physical cash can help conceal and transfer funds outside of regulated financial systems. With the growing adoption of CBDCs, payments and transfers will be easier to identify and trace to previous sources, significantly reducing the risk of fraud and money laundering.

Fiat money is a currency that lacks intrinsic value and is established as a legal tender by government regulation.

- Digital currencies have all the intrinsic advantages of fiat currency like it is durable, portable and fungible. Being digital, it will make it easily verifiable, more secure and traceable. Hence, improving upon the existing advantages of paper currency.

Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type.

Experts, however, observe that there are also certain negatives attached to the CBDCs.
The approach of bringing a sovereign digital currency stands in stark contrast to the idea of decentralisation. Cryptocurrencies, on the other hand, came into existence intending to eliminate the middleman, thereby establishing a system of trust without the need to depend on any single entity. CBDCs would again rely on the banking system, as these are just the digital version of fiat currency.
Central banks might indulge in issuing more digital currencies which could potentially trigger higher inflation.

Digital currencies are gaining more and more traction by the day, and there are countries which have launched, or are going to be launching digital currencies, including Ecuador, Tunisia, Senegal, Sweden, Estonia, China, Russia, Japan, Venezuela, and Israel.
Reports say that 81 countries, representing over 90 per cent of Global GDP, are exploring CBDCs. Fourteen counties have tested pilots, in 16 countries such currencies are in the development phase, and 32 countries in the research phase. Fourteen major economies, including China and South Korea, have tested pilots.
China is currently leading the race of CBDCs, and has recently released a report which mentioned $ 5.5 billion worth transactions carried out during the digital Yuan pilot run. China has plans to introduce digital Yuan in the winter Olympics next year.

The central bank will have to carefully analyze the pros and the cons of digital currencies before they are rolled out in India.

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