The Reserve Bank of India plans to launch pilot projects to evaluate the viability of employing digital currency for both wholesale and retail transactions. These initiatives aim to refine the central bank’s approach towards potentially implementing a comprehensive framework for central bank digital currency (CBDC).

About Central Bank Digital Currency (CBDC)

• CBDCs are a form of digital currency issued by a country’s central bank.
• Examples of central banks include the Reserve Bank of India (RBI), the US Federal Reserve System, the Bank of Japan.
• CBDCs are similar to stablecoins, except that their value is fixed by the central bank and equivalent to the country’s fiat currency.

Need for

Implementing an official digital currency would significantly diminish currency management expenses while facilitating instantaneous transactions devoid of inter-bank settlements. India’s relatively elevated currency-to-GDP ratio presents an additional advantage of Central Bank Digital Currency (CBDC) adoption. By replacing substantial cash transactions with CBDC, the expenditure on printing, transporting, and storing physical currency could be significantly curtailed. The requirement for inter-bank settlements would become obsolete as CBDC would function as a liability of the central bank transferred directly between individuals.

What is the CBDC or National Digital currency?

A Central Bank Digital Currency (CBDC), also known as a national digital currency, represents the electronic rendition of a nation’s fiat currency. Rather than relying on physical printing or minting, the central bank administers digital tokens. These tokens derive their value from the complete trust and creditworthiness of the government.

SC Garg Committee recommendations (2019)

• The panel suggests a complete ban on all activities related to cryptocurrencies, including mining, holding, transacting, or dealing.
• Exchange or trading in digital currencies would be punishable by a jail term ranging from one to 10 years.
• The authorities may impose a monetary penalty of up to three times the amount lost by the exchequer or gained by the cryptocurrency user.
• However, the panel recommends that the government remain open to the possibility of the Reserve Bank of India issuing its own cryptocurrencies.

Challenges in rolling out National Digital Currency

• Cybersecurity Vulnerability: The populace’s insufficient digital literacy heightens susceptibility to cyber threats.
• Challenges of Digital Currency: The adoption of digital currency introduces complexities in regulation, monitoring investments, tracking purchases, and taxation.
• Privacy Concerns: Digital currency necessitates the collection of personal information for verification, posing a threat to individual privacy.

Advantages

• It provides businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. 
• It also decreases the cost of maintenance that a complex financial system requires.
• It reduces cross-border transaction costs.
• It would also reduce the risks associated with using digital currencies, or cryptocurrencies, in their current form. CBDCs, backed by a government and controlled by a central bank, would give households, consumers, and businesses a secure means of exchanging digital currency.

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