Why is it in the news?

• The Reserve Bank of India (RBI) suggests that Central bank digital currency (CBDC) has the potential to streamline and reduce time and cost for cross-border transactions.

More about the news

• CBDCs, or Central Bank Digital Currencies, are a digital form of currency issued by a country’s central bank. They share similarities with cryptocurrencies, but their value is fixed and equivalent to the country’s fiat currency.
• Fiat money refers to government-issued currency that is not backed by a physical commodity like gold or silver. It holds value as legal tender for goods and services.
• The Union Budget 2022-23 announced the introduction of CBDC in India, reflecting a strategic move towards digitization and modernizing the financial landscape.

Need of CBDCs

• CBDCs can address the issue of financial exclusion by providing a means for those without access to traditional banking to engage in transactions and other financial services.
• CBDCs have the potential to streamline payment processes, reducing transaction costs and settlement times. This efficiency can contribute to a more robust and responsive financial ecosystem.
• CBDCs serve as a tool for central banks to respond swiftly to financial crises or emergencies by injecting liquidity into the economy more effectively compared to traditional measures.
• CBDCs could revolutionize cross-border payments, making them faster and more efficient. This could reduce reliance on correspondent banks and intermediaries, simplifying the global transaction landscape.
• Real-time monitoring of CBDC transactions enables central banks to promptly detect unusual or suspicious activities, providing a proactive approach to combating counterfeit currency.

Concerns of CBDCs

• The widespread lack of digital literacy in India poses a significant challenge to the seamless adoption of CBDCs, as many individuals may not be ready for a digital form of currency.
• The use of CBDCs involves extensive collection and processing of financial data, raising concerns about data security and the vulnerability to Cyber-attacks.
• CBDCs could provide governments with increased tools for monitoring and controlling financial transactions, sparking concerns about individual privacy and potential infringements on civil liberties.
• If not properly regulated and monitored, CBDCs could be exploited for illicit trading, criminal activities, and organized crimes, posing risks to the financial system’s integrity.
• The adoption of new technology for CBDCs introduces operational risks, including system failures, cyber threats, and technical glitches that could disrupt the smooth functioning of the financial system.
• Those without access to digital technology may face exclusion from the financial system if CBDCs become the dominant form of currency, exacerbating existing issues of financial inclusion.
• The legal status and framework for CBDCs are still evolving, leading to uncertainties regarding liability, consumer protection, and contract enforcement.

Status of CBDCs

• Some countries, including The Bahamas, Jamaica, and Nigeria, have already introduced CBDCs.
• Other nations, such as China, the USA, UAE, Ghana, Malaysia, Singapore, and Thailand, are in the pilot phase of launching CBDCs.
• In 2022, the Reserve Bank of India (RBI) took a significant step by launching the first pilot of the Digital Rupee in the retail segment (e₹-R), indicating India’s commitment to embracing digital currency.