The RBI intends to introduce its own digital currency called Central Bank Digital Currency (CBDC). Thus by definition, CBDC is a legal tender by a central bank in digital form. Central banks all over the world are examining this idea. The RBI will test the idea for both the wholesale and retail sector. It will work out the idea over a period of time. There are deliberations on the pros and cone of the digital currency. There are lessons for the RBI from the experience of other countries.
There are several issues under consideration.
o is the currency for use in the retail or wholesale sector
o whether the technology be the distributed ledger (blockchain) or a centralised ledger
o whether the technology should adapt to the cases while in use
o whether it will be token-based or account-based for validation
o whether it will be distributed through the RBI or through commercial banks
o the degree of anonymity for such currency
o changes in laws to introduce CBDC, say RBI Act, Coinage Act, FEMA, IT Act.
The private CBDC do not follow proper jurisdiction. They can disrupt the established model of fiat currency available within a border.
Once the virtual currencies are established, the national currencies with limited convertibility will be under threat.
Digital currency has the potential to replace cash if anonymity is ensured. It will reduce the burden on the RBI to print, store and distribute metal and paper currency. It will save the costs.
If CBDCs are adopted extensively, they will cause a reduction of bank deposits and the day-to-day liquidity for settlement of transactions. They could take the public away from banking.
This will have the direct effect on the potential of the banks to create cash credit or bank money. It will affect the lending capacity of the banks.
Thus introduction of CBDC by the RBI requires careful consideration. It could be extremely disruptive.
In general, central banks perform four functions in payment. First of all, it provides the means of payment and its denomination. Next it provides finality of payment. Cash provides instant finality, whereas with other means, the finality occurs when the Central Bank effects credit and debits to reflect the net payments. Thirdly, it provides liquidity to facilitate smooth payment. Last, it oversees system’s integrity and efficiency. A CBDC makes all these more effective.
A CBDC could allow every citizen to have an account with the central bank.