It’s time for digital currency to counter crypto, says RBI

What is the news?

The Reserve Bank of India (RBI) has said that it is working towards a phased implementation strategy for its digital currency (i.e. Central Bank Digital Currency).

• Central banks across the world have drawn up plans to launch their digital currency to battle cryptocurrencies. China has said that its e-CNY has been tested in 70 million transactions.

Why RBI wants a CBDC for India?

• It would reduce currency costs for the government and would help offset the threat of virtual currencies.
• Developing our own CBDC could provide the public with uses that any private virtual currency can provide, and to that extent might retain the public preference for the rupee.
• It could also protect the public from the abnormal level of volatility that some of these virtual currencies experience.

Issues

• On the consequences of digital currencies on banks: While it could reduce the need for maintaining deposits, the impact would be limited as they cannot pay interest.
• Key concerns: There are a few key concerns expressed by RBI:
  • Whether digital currency should be used in retail payments or also in wholesale payments?
  • Whether it should be a distributed ledger or a centralized ledger?
  • Further, whether it should be token-based or account-based?
  • Lastly, whether it should be directly issuance by the RBI or through banks and the degree of anonymity?

Terms to know:

• Central bank Digital Currency (CBDC)