The Reserve Bank of India (RBI) is planning to launch its Central Bank Digital Currency (CBDC)— the digital rupee. The proposition follows a proposed amendment to the Reserve Bank of India Act, 1934, which would facilitate its creation. This technological undertaking could potentially revolutionize the country’s financial system by introducing a digitized version of the Indian rupee.
What is a Central Bank Digital Currency (CBDC)?
Central Bank Digital Currencies (CBDCs) are digital versions of paper currencies, backed and issued by a central authority – the central bank. Just like fiat currency, they’re exchangeable on a one-to-one basis. However, unlike cryptocurrencies that operate without regulatory oversight, CBDCs are legal tender. The digital manifestation of a national currency can be transacted using wallets supported by blockchain technology.
The Objective of Introducing CBDCs
One of the primary goals of introducing a CBDC is to reduce the costs and risks associated with handling physical cash. This includes the expenses related to insurance, transportation, and the replacement of damaged notes. Moreover, it aims to shift the population’s preference from cryptocurrencies to a more regulated and secure form of digital money.
Global Trends in CBDC Implementation
Around the globe, several nations have already started trialing their national digital currencies. For instance, the Bahamas has launched a nationwide CBDC dubbed ‘Sand Dollar’. Nigeria introduced the eNaira in 2020, and China piloted its digital currency e-CNY in the same year. Other countries like South Korea, Sweden, Jamaica, and Ukraine have also embarked on tests for their digital currencies.
Benefits and Challenges of Implementing CBDC
There are numerous potential benefits and challenges tied to the introduction of a CBDC. On the plus side, it merges traditional and innovative practices by reducing the handling cost of money. It improves the speed and reliability of domestic payment and settlement systems while paving the way for financial inclusion.
However, there are significant challenges to address. Privacy concerns, potential data breaches, operational risks, cyber security threats, and technological obsolescence are chief among them. Additionally, they could pose a threat to weaker banks if e-cash becomes popular and the RBI places no limit on the amount that can be stored in mobile wallets.
Planning the Implementation of CBDC
The implementation of CBDCs should focus on enhancing the payment and settlement system while avoiding serving as a store of value to circumvent the risks associated with disintermediation. Ensuring strong data security is crucial, given the sensitive nature of the financial data collected on digital currency transactions. Employing robust technology, carefully mapping the technology landscape, and close interaction between banking and data protection regulators is essential.
Examples from UPSC Civil Services Examination Previous Year Questions (PYQs)
One of the previously asked questions in the Civil Services Examination 2020 was about blockchain technology. Candidates were asked to consider three statements and identify the correct ones. The answer was statement 1 and 3 only. Another question, posed in 2018, asked candidates to match certain terms with their context/topic. Only pair 2 (Blockchain technology: Digital/Cryptocurrency) was correctly matched. Lastly, a mains question in 2021 asked candidates to describe what cryptocurrency is, its impact on global and Indian society.
