Considerations of CBDC

Considerations of CBDC
As per the recent reports, the Reserve Bank of India's (RBI) Digital Rupee Central Bank Digital Currency
(CBDC) may start with wholesale businesses in the current financial year. The RBI proposed amendments
to the Reserve Bank of India Act, of 1934, which would enable it to launch a CBDC.
Central Bank Digital Currency (CBDC)
 Introduction:
CBDCs are digital forms of fiat currency and are legal tender issued and backed by a central bank, unlike
cryptocurrencies they are not governed by any regulatory body. It is identical to fiat currency and is
exchangeable one-to-one with fiat currency.
Fiat currency is a national currency that is not pegged to the value of a commodity such as gold or silver.
Although the concept of CBDCs was directly inspired by bitcoin, it is distinct from decentralized virtual
currencies and crypto assets that are not state-issued nor 'legal tender'.
 Objective:
Its main objectives are risk mitigation and management of real currency, phasing out of old notes, and
reducing costs associated with transportation, insurance, and logistics. It will also keep people away
from cryptocurrencies as a means of money transfer.
 Global trend:
The Bahamas is the first economy to launch its CBDC Sand Dollar nationwide. Nigeria is another country
that launched eNaira in the year 2020. China became the first major economy in the world to operate
the digital currency e-CNY in April 2020. Korea, Sweden, Jamaica, and Ukraine are some of the countries
that have started testing their digital currency and many more may soon follow.
 Benefits of CBDC:
1. Combination of tradition and innovation:
CBDCs can gradually bring about a cultural shift towards virtual currency by reducing currency
management costs.
2. The CBDC is envisaged to bring together the best of both sides:
Where the convenience and security of digital forms such as cryptocurrency involve the regulated,
reserve-backed money circulation of the traditional banking system.
3. Cross-border payments with ease:
CBDCs can provide a reliable sovereign-backed domestic payment and settlement system as an easy
means to partially replace paper currency. It can also be used for cross-border payments; It can
eliminate the need for an expensive network of correspondent banks to settle cross-border payments.
1
4. Financial Inclusion:
One can also find increased use of CBDCs in relation to many other financial activities to move the
unorganized economy towards the organized sector to ensure better tax and regulatory compliance. It
can also pave the way for furthering financial inclusion.
 Challenges of CBDC:
1. Privacy Issues:
The central bank will potentially store a large amount of data regarding user transactions which poses a
risk to the individual's privacy. This has serious implications as digital currency transactions are not able
to protect users' privacy at user’s same level as compared to cash transactions. The settlement of credit
is the main issue in this.
2. Reduction in the intermediation of banks:
If a sufficiently large and broad-based CBDC changes, it could affect the bank's ability to return funds in
credit intermediation. If e-cash becomes popular and the Reserve Bank of India (RBI) places no limit on
the amount that can be stored in a mobile wallet, banks may be forced to maintain low-cost deposits as
well. can struggle.
3. Other Risks:
The rapid obsolescence of the technology could pose a threat to the CBDCs ecosystem; As a result, a
higher cost of upgradation may have to be incurred. Staff will need to be retrained and prepared to
adapt to CBDCs as the intermediary’s risk. Advanced cyber security risk vulnerability testing and the cost
of protecting firewalls. Operational burden and cost for the central bank in managing CBDCs.
 We have tried to bring up some ways forward to this:
To address the shortcomings of CBDCs, should they have a payment-centric use for reforming the
payment and settlement system.
It can then move away from serving as a store of value to avoid arbitrage risk and its major monetary
policy effects.
The central bank will have to put in place robust data security systems to mitigate the serious security
risks posed by data stored in a centralized system and prevent data breaches.
It is therefore of utmost importance to use high-end technology, which will offer a solution to the CBDC
issue.
If payment transactions are to be carried out using this system, providing the necessary infrastructure
for a CBDC will remain challenging.
RBI will have to assess the technology landscape well and proceed carefully with the appropriate
technology to introduce CBDCs.

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Considerations of CBDC

Central Bank Digital Currency (CBDC)

1. Combination of tradition and innovation:

2. The CBDC is envisaged to bring together the best of both sides:

3. Cross-border payments with ease:

2. Reduction in the intermediation of banks:

 We have tried to bring up some ways forward to this:

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