The RBI is working for the phased introduction of Central Bank Digital Currency (CBDC).
Context
The RBI is working for the phased introduction of Central Bank Digital Currency (CBDC).
About the Central Bank Digital Currency (CBDC)
- A CBDC is a legal tenderthat is issued by a central bank in a digital form.
- It is similar to fiat currency and is exchangeable one-to-one with the fiat currency.
- Amendments would be required in the following acts:
- Coinage Act
- Foreign Exchange Management Act (FEMA)
- Information Technology Act
Committee to examine digital currency
- The finance ministry had set up a high-level inter-ministerial committee, in 2017, to examine the policy and legal framework for the regulation of virtual/crypto currencies.
- The committee recommended the introduction of CBDCs as a digital form of fiat money in India.
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Significance of the CBDC
- The development of a domestic CBDC could provide with uses that any private virtual currency (VC) offers.
- It could also protect the public from the abnormal level of volatility from the private virtual currency (VC).
- Introduction can reduce dependency on cash, higher seigniorage due to lower transaction costs and the reduced settlement risk.
- CBDC would lead to a more robust, trusted, efficient, regulated, and legal tender-based payments option.
- Several countries have already implemented specific purpose Central Bank Digital Currencies (CBDCs) for the wholesale and retail segments.
Key issues with the implementation
- Scope of CBDCs
- Underlying technology
- Validation mechanism
- Distribution architecture
