- Recently, the Reserve Bank of India (RBI) has proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a Central Bank Digital Currency (CBDC), thus enhancing the scope of the definition of ‘bank note’ to include currency in digital form.
- The move has come amid the government’s plans to introduce a Bill on cryptocurrencies in the current Parliament session that seeks to prohibit all private cryptocurrencies in India with certain exceptions.
- 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 is a legal tender issued by a central bank in a digital form.
- Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed.
- Though the concept of CBDCs was directly inspired by bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
- The need for a sovereign digital currency arises from the anarchic design of existing cryptocurrencies, wherein their creation, as well as maintenance, are in the hands of the public.
- By regulating digital currency, the central bank can put a check on their malpractices.
Digital Currency Proxy War:
- India runs the risk of being caught up in the whirlwind of a proxy digital currency war as the US and China battle it out to gain supremacy across other markets by introducing new-age financial products.
- Today, a sovereign Digital Rupee isn’t just a matter of financial innovation but a need to push back against the inevitable proxy war which threatens our national and financial security.
- Digital Rupee provides an opportunity for India to establish the dominance of Digital Rupee as a superior currency for trade with its strategic partners, thereby reducing dependency on the dollar.
- If these private currencies gain recognition, national currencies with limited convertibility are likely to come under some kind of threat.
- It would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
- India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC to the extent large cash usage can be replaced by (CBDC), the cost of printing, transporting and storing paper currency can be substantially reduced.
- It will also minimize the damage to the public from the usage of private virtual currencies.
- It will enable the user to conduct both domestic and cross border transactions which do not require a third party or a bank.
- It has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk.
- It would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.
- The creation of a Digital Rupee will provide an opportunity for India to empower its citizens and enable them to use it freely in our ever-expanding digital economy and break free from an outdated banking system.
- Looking into its impact on macroeconomy and liquidity, banking systems and money markets, it is imperative of policymakers to thoroughly consider the prospects of Digital Rupee in India.
SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT