- British authorities are exploring the possibility of creating a Central Bank Digital Currency, being touted as “Britcoin.”
- It is a step towards future proofing Pound Sterling (currency of the United Kingdom) against cryptocurrencies and improving the payments system.
- In the wake of declining cash payments in the country partly due to the Corona pandemic, the Bank of England and the Treasury are considering creating Digital Currency.
- The Digital currency, if passed, would exist alongside cash and bank deposits and act as a new form of money to be used by households and businesses in England.
- It would sit at the interface between cash and private payments systems and would not necessarily be based on distributed ledger technology.
- This ‘britcoin’ would be tied to the value of the pound to eliminate holding it as an asset to derive profit.
- The move could have an economic impact in the form of wider investment into the UK tech sector and lower transaction costs for international businesses.
- Britain’s digital currency would be different in a key sense as if passed, it would be issued by state authorities.
- Currently, only the Bahamas has such a currency, though China is trialing it in several cities.
- Digital currency is a payment method which is in electronic form and is not tangible.
- It can be transferred between entities or users with the help of technology like computers, smartphones and the internet.
- Although it is similar to physical currencies, digital money allows borderless transfer of ownership as well as instantaneous transactions.
- Digital currency is also known as digital money and cybercash. E.g. Cryptocurrency.
Central Bank Digital Currency:
- 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).
- Fiat Currency: It is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
- A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
- Each unit acts as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account.
- CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system.
- New forms of digital money could provide a parallel boost to the vital lifelines that remittances provide to the poor and to developing economies.
- It will ensure that people are protected from financial instability caused due to the failure of private payments systems.
- Ensures that central banks retain control over monetary policy against the remote possibility that payments might migrate into cryptocurrencies over which they have no leverage.
- There is a need to enforce strict compliance of Know Your Customer (KYC) norms to prevent the currency’s use for terror financing or money laundering.
- Existence of digital money could undermine the health of commercial banks as it removes deposits on which they primarily rely for income.
- India’s Stand on Digital Currency:
- Reserve Bank India (RBI) had considered cryptocurrencies as a poor unit of account and also demonstrated by their frequent and high fluctuation in value.
- According to RBI, it pose several risks, including anti-money laundering and terrorism financing concerns (AML/CFT) for the state and liquidity, credit, and operational risks for users.
- However, it is considering developing a sovereign digital currency when the time is appropriate.
SOURCE: THE HINDU ,THE ECONOMIC TIMES ,MINT