Published: 2nd Aug, 2021
Context
The RBI is working for the phased introduction of Central Bank Digital Currency (CBDC).
About
About the Central Bank Digital Currency (CBDC)
- A CBDC is a legal tenderthat is issued by a central bank in a digital form.
- It is similar to fiat currency and is exchangeable one-to-one with the fiat currency.
- Amendments would be required in the following acts:
- Coinage Act
- Foreign Exchange Management Act (FEMA)
- Information Technology Act
- The finance ministry had set up a high-level inter-ministerial committee, in 2017, to examine the policy and legal framework for the regulation of virtual/crypto currencies.
- The committee recommended the introduction of CBDCs as a digital form of fiat money in India.
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Digital currency
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Significance of the CBDC
- The development of a domestic CBDC could provide with uses that any private virtual currency (VC) offers.
- It could also protect the public from the abnormal level of volatility from the private virtual currency (VC).
- Introduction can reduce dependency on cash, higher seigniorage due to lower transaction costs and the reduced settlement risk.
- CBDC would lead to a more robust, trusted, efficient, regulated, and legal tender-based payments option.
- Several countries have already implemented specific purpose Central Bank Digital Currencies (CBDCs) for the wholesale and retail segments.
Key issues with the implementation
- Scope of CBDCs
- Underlying technology
- Validation mechanism
- Distribution architecture
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