- A Central Bank Digital Currency (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
- It is basically the virtual form of a fiat currency created and regulated by the nation’s monetary authority or central bank (Reserve Bank of India).
- It is a digital token or electronic record of a country’s official money.
- It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet.
- The underlying technology, form and use of a CBDC can be moulded for specific requirements. CBDCs should be exchangeable at par with cash.
Significance of Central Bank Digital Currency
- It would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
- India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC to the extent large cash usage can be replaced by (CBDC), the cost of printing, transporting and storing paper currency can be substantially reduced.
- It will also minimize the damage to the public from the usage of private virtual currencies.
- It will enable the user to conduct both domestic and cross border transactions which do not require a third party or a bank.
- It has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk.
- It would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.
Advantages of Central Bank Digital Currency
- It makes monetary policy and government functions easier to implement.
- It connects the banks and consumers without involving the third party so reduces the risk of the third party.
- It is possible to introduce privacy features in a CBDC system.
- It reduces the cost of financial inclusion of the population of the country.
- It helps the central bank to track the flow of money under its jurisdiction which helps to eliminate the illegal transactions.
Disadvantages of Central Bank Digital Currency
- lt does not decentralize the economy as the central bank controls data of transactions between the banks and their consumers.
- The privacy of users was compromised to some extent.
- Legal and regulatory issues act like limitations.
Difference between CBDC and Cryptocurrency
They are managed by monetary authorities (e.g. Reserve Bank of India).
They are managed by computers.
Transaction details are under the central authority and it decides what to do with the information.
The information of transactions is in the public domain and can be accessed by anybody through blockchain technology.
Its value is much stable as it is backed by an authority.
Its value can vary to much more as it does not have an authority to support it.