Decoding Central Bank Digital Currency (CBDC)
According to Budget 2022, RBI will begin issuing Central Bank Digital Currency in2022-23.
What is a Central Bank Digital Currency (CBDC)? A CBDC is an electronic record or digital token of a country’s official currency. It is issued and regulated by the country’s central bank. They are backed by the full faith and credit of the issuing government.
Effect on Banking System
Depending on the extent to which CBDCs are employed, they may affect demand for bank deposits. CBDC transactions reduce transaction liquidity requirements, such as intra-day liquidity, and lower settlement risk. Furthermore, by providing a more risk-free alternative to bank savings, it is possible that a shift away from bank deposits will occur.
Also, Banks’ ability to issue loans is affected if they begin to lose deposits. Hence, the impact on bank lending in the Indian economy must be carefully studied. Furthermore, when banks lose substantial quantities of low-cost transaction deposits, their interest margins may be pressured, resulting in a spike in lending rates that could have a negative impact on the Indian economy. Hence, it is vital to design and administer CBDC keeping bank deposits in mind.
The technical ecology of the Digital Rupee could be subject to cyber-attacks. As a result, financial organisations dealing with the Digital Rupee must maintain high cybersecurity standards while simultaneously emphasising financial literacy.
The Trade Off – CBDC and User Privacy
CBDC allows payment devices to collect a variety of data and information related to payments and transactions, which could lead to privacy threat.
Few people, on the other hand, believe that CBDC provides the Justice Department more alternatives in dealing with money laundering and tax evasion. This could benefit the Indian economy by increasing tax revenue at the expense of individual financial privacy.
Indian Legal Framework for CBDC
Even though CBDCs are identical to banknotes, their acceptance would necessitate the construction of a suitable legal framework, as current legal norms are geared toward paper money.
In Conclusion, the deployment of the Digital Rupee has the potential to provide significant benefits, such as Transparency improvement, Employment growth, Boost to the fintech sectorand Enhance digital payments. CBDC could pave the way for a more efficient and cheaper currency management system. However, there are hazards involved, which must be carefully balanced against the potential benefits.