Daily News Analysis » Central Bank Digital Currency (CBDC)

Central Bank Digital Currency (CBDC)

According to reports, the RBI’s digital rupee — the Central Bank Digital Currency (CBDC) may be introduced in phases in 2022-23...

Why in the News?

According to reports, the RBI’s digital rupee — the Central Bank Digital Currency (CBDC) may be introduced in phases in 2022-23.

About Central Bank Digital Currency:

According to the RBI, CBDC is the legal tender issued by a central bank in a digital form.

What is Legal Tender?

Legal Tender is any form of paymentrecognized by a government, used to pay debts or financial obligations, such as tax payments.
- For Example, National currencies, such as the U.S. dollar, Rupee are legal tender.
In the U.S, the Treasury is authorised to create and issue dollars to the public.
Laws ensure nothing other than official legal tender gains enough traction to be used as money in the economy.

It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
- Only its form is different.
The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
CBDCs enable the user to conduct both domestic and cross-border transactions which do not require a third party or a bank.
Central bank digital currencies would also reduce the risks of using digital currencies in their current form.
The digital rupee will be the digital version of physical cash.

Benefits:

Cryptocurrencies	CBDCs
Unregulated and decentralized.	Regulated by Central Bank i.e. incase of India (RBI)
Use a permissionless open network	Use a private permissioned block chain network
Users that use cryptocurrency have anonymity	CBDCs will be attached to a person’s existing bank account, containing their personal information.

Similarities of Cryptocurrencies and CBDCs

Both cryptocurrencies and CBDCs are virtual assets that exist in online infrastructure.
They both reduce the need for physical cash and streamline paying for goods and services.
They also use the basic concept of blockchain technology, like storing transaction data in blocks and using nodes to verify transactions.

- - Wholesale CBDCs are similar to holding reserves in a central bank.
  - The central bank grants an institution an account to deposit funds or use to settle interbank transfers.
  - Central banks can then use monetary policy tools such as reserve requirements or interest on reserve balances to influence lending and set interest rates.

- Retail CBDCs are government-backed digital currencies used by consumers and businesses.
- Retail CBDCs eliminate intermediary risk—the risk that private digital currency issuers might become bankrupt and lose customers’ assets.

As of March 2022, there were nine countries and territories that had launched CBDCs.

Also referred to as Distributed Ledger Technology (DLT), Blockchain is a system which helps in recording information.
The system is basically a digital ledger of transactions that is distributed with the entire network of computer systems and servers on the blockchain.
Every block in the chain contains information of transactions made and every new transaction’s information is added to each participant’s ledger.
In this way, the database is managed by multiple participants and is decentralised (there is no central agency managing the system).
Bitcoin and other digital currencies such as Ethereum use blockchain technology to function.