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Reserve Bank of India (RBI) deputy governor T.Rabi Sankar recently said that the RBI has been working towards the commencement of pilot projects to assess the feasibility of using digital currency as a payment mode in India. It will help devise a strategy towards a full-scale introduction of Central Bank Digital Currency (CBDC). It is in the backdrop of the growing concern about the significant risks of digital currencies like bitcoin and cryptocurrency posing a threat to the Indian financial system. European Central bank has also, very recently, approved a multi-year project to create a digital version of the euro.
What is the CBDC or National Digital Currency?
Digital currencies are the currencies that are accessible with computers or mobile devices. They exist only in electronic form. When issued by a central bank, it is called a Central Bank Digital Currency (CBDC). The Central bank issues electronic tokens, the value of which is backed by the full credit of the government.
Why is the RBI working towards introducing Digital currency?
The risks associated with unregulated payment modes and the emergence of other virtual currencies, such as Bitcoin, has compelled the central banks of various nations to work towards introducing their digital currency
The high currency to GDP ratio in India holds out another benefit of CBDC. The humongous cash usage can be replaced by digital currency to some extent, thereby reducing the costs of currency management like printing, transporting and storing paper currency.
Real-time payments can be made with the official digital currency while virtually reducing the risk of dollar-rupee transactions.
RBI is planning to design CBDC in a way that promotes non-anonymity of transactions. The same would help to reduce the risks of money laundering and terrorism financing. The direct transfer feature can also help in financial inclusion through an official digital currency.
Challenges in rolling out National Digital Currency
The potential threat of cybersecurity is one major challenge hampering the introduction of a National Digital Currency. Another issue facing India, in general, is the lack of digital literacy of our population. Despite active efforts towards a cashless economy, with initiatives such as the Digital India Mission, there is still not much progress in the direction. India is still in a nascent stage for the technology infrastructure.
The other challenges of an official digital currency are concerning the regulation, taxation of individuals and tracking investment and purchase.
Privacy poses another challenge as the digital currency will need to collect some basic information regarding an individual to prove their status as the holder of the currency.
To keep up with the rapid technological advancements and to safeguard the financial institutions and individuals against the risks of unregulated digital currencies, central banks globally are competing to launch their digital currencies.
The RBI is also working on the same lines. However, given the challenges discussed above, significant steps will need to be ensured before the full implementation of CBDCs to ensure a smooth and secure environment for digital currencies in India.
This article has been written by Khanak Sharma for the Paradigm.
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