Central Bank Digital Currency (CBDC) | Science & Technology for UPSC CSE PDF Download

Introduction

Central Bank Digital Currency (CBDC), often referred to as a national digital currency, is the electronic form of a country's fiat currency, issued by the central bank and backed by the government's credit. In India, the Reserve Bank of India (RBI) is considering the implementation of CBDC and is planning pilot projects to assess its viability.

Benefits of CBDC

Reduced Currency Management Costs:

• CBDC eliminates the need for physical currency printing and coin minting.
• It significantly reduces the cost associated with transporting and storing paper currency.

Real-time Payments:

• CBDC allows for real-time payments, eliminating the need for inter-bank settlements.
• Transactions can occur instantly without delays.

SC Garg Committee Recommendations (2019)

The SC Garg Committee made several recommendations related to digital currency and cryptocurrencies in India:

Ban on Cryptocurrencies:

• Proposed a ban on mining, holding, transacting, or dealing with cryptocurrencies in any form.

Penalties for Cryptocurrency Activities:

• Recommended jail terms ranging from one to ten years for engaging in cryptocurrency exchange or trading.
• Suggested monetary penalties, which could be up to three times the loss to the exchequer or gains made by cryptocurrency users.

Open Mind on CBDC:

• Despite recommending a ban on cryptocurrencies, the committee suggested that the government should remain open to the issuance of cryptocurrencies by the RBI.

Challenges in Rolling Out National Digital Currency

Cybersecurity Threat:

• Implementing CBDC could expose the financial system to potential cybersecurity threats and vulnerabilities.

Digital Literacy:

• A significant portion of the population may lack digital literacy, which could hinder the adoption and use of CBDC.

Regulation Challenges:

• The introduction of digital currency presents regulatory challenges, including tracking investments and purchases, taxation of individuals, and ensuring compliance with financial laws.

Privacy Concerns:

• CBDC requires the collection of basic individual information to verify ownership.
• This raises privacy concerns related to the handling and use of personal data.

Conclusion

The Reserve Bank of India is exploring the possibility of introducing a CBDC to modernize the payment system, reduce currency management costs, and potentially replace physical cash. However, this initiative is not without its challenges, including cybersecurity risks, the need for digital literacy, regulatory complexities, and privacy considerations. As India progresses toward CBDC implementation, a balance between innovation and security will be crucial to its success.