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.

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