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RBI plans for the ‘Phased Introduction’ of digital currency

  • Category
    Economy
  • 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.

Digital currency

  • Digital currency is a currency, money, or money-like asset which is managed, stored or exchanged on digital computer systems, over the internet.
  • Types of digital currencies include the crypto-currency, virtual currency and central bank digital currency. 

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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