RBI DIGITAL CURRENCY (CBDC)

The idea of Digital currency originated from Nobel Laureate James Tobin, an American Economist, and he suggested that the Reserve Bank of the US shall provide a widely accessible medium of exchange and the safety of currency.

So, the idea of digital currency is not a new one.

The Central Bank of India is stepping towards digital currency, on the basis of its report, which shows that in recent years the use of cash has declined due to the ongoing Covid Pandemic. But this is not the single reason, we will discuss more reasons below.

A high-level ministerial meeting set up by the Finance Ministry has recommended introducing Central Bank Digital Currency(CBDC), with some changes in the legal framework and including the RBI Act(which gives the authority to RBI to issue banknotes).

ABOUT CBDC
It will be a type of Fiat Currency(i.e it doesn’t have any intrinsic value, or it is not backed by any commodity such as gold).
So, they are just similar to the banknotes or coins, the difference is only in their existence, they are digitally present in a digital wallet, and will be supervised by RBI.

Quoting RBI statement -” A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.”

WHAT CBDC IS NOT
CBDC is a digital or virtual currency, but it is not the private virtual currencies that have started in the last decade.

According to the Corporate Finance Institute -” Virtual currency is a type of unregulated digital currency. It is issued and controlled by a private issuer instead of a central bank. Therefore, it is not subject to any monetary policy. A virtual currency can be either centralized or decentralized”.

Examples of Private virtual currency are cryptocurrency, bitcoin etc.

Now one can think that CBDC is a type of demand deposit, but it is not. Demand deposits or physical cash will be continued in use, people can withdraw their money from demand deposits. But there is an option, that people can convert their bank deposits or demand deposits into the new digital rupee.

REASONS FOR ISSUING THE DIGITAL CURRENCY BY THE CENTRAL BANK

  1. Increasing Demand for Digital Currency
    From the period of Covid, the need and awareness of society vastly spread the use of digital payments.
    People are also aware of fake currency circulating in the economy, for instance, according to a report of NCRB(National Crime Records Bureau) fake currency totalling 287,404 notes worth ₹25.3 crores was seized under Fake Indian Currency Notes (FICN) in 2019.
  2. Cost Required
    It is very clear that printing of notes and minting of coins also takes money, and CBDC will take less cost than printing or minting.
  3. Corruption
    This system can also be called an initiative for controlling corruption because all money will be under the eye of some authorities.

PROBLEMS IN ISSUING CBDC
Every coin has two facets, which is an old idiom but is universally working.

When people start converting their bank deposits in digital currency, then the loan amount available to banks will decrease.

When people convert their currency in CBDC, then RBI has to take these liabilities onto its own balance sheet.

WHAT CAN RBI DO TO TACKLE THOSE PROBLEMS
RBI may introduce the upper limit of converting currency in CBDC.
May provide funds to commercial banks, so that process of credit giving should not have interfered.
Impose penalties, if withdrawing a bulk amount.

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