Finance Minister has announced the reserve bank of India (RBI) will soon issue a central bank - backed digital currency (CBDC). What is CBDC, and what is need for it? What changes will it bring for country?
CBDC is the legal tender issued by the central bank in digital form. Budget 2022 is death of crypto assets in India. Introduction of CBDC will give a big boost to India's digital currency.It will lead to more efficient and cheaper currency management system. It is the same as a fiat currency and is exchangeable one-to-one with fiat currency.
Why do we need CBDC?
This will act as a substitute for private digital currencies. With the diminishing use of paper currencies, there is a need to popularize digital currency.
Which one to use digital payments or CBDC?
In a UPI system where CBDC is transacted instead of bank balances, the need for interbank settlement disappears. It would also be effective in global payments more effectively.
What is use of a digital rupee?
- CBDC will bring all benefits that we see with cryptocurrencies as well as with digital forms of payments.
- Digital currency can never be torn, burnt or physically damaged. They cannot be physically lost either. As transactions will go digital, this will save the cost of printing currencies.
Impact of CBDC on banks
It could reduce transaction demand for bank deposits. The central bank will become lender of first instead of last resort. The custodian of everyone's cash and the clearer of all transactions will now be the central bank and there will be no need for paper money since a CBDC unit is itself a direct central bank liability, and exactly equal to paper money. In CBDC all transactions could be monitored with the help of data analytics and artificial intelligence to quickly identify banks.
When?
It would require several amendments to the RBI act, the FEMA, and the information technology act since existing legal provisions were created with paper currency in mind. It may be possible to launch CBDC once the crypto law is passed in India.
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