Money serves three functions: it’s a procedure of value, an unit of account, and a circulating medium. A government-backed currency must be considered as a public good, and a public organization should be accountable for supplying it.
With the introduction of new technology and continuously altering user needs, the method we pay is headed for a massive upgrade. In lots of economies, cash is now seeming to vanish, paving the way for a new type of payment system that is mainly digital.
It is on these lines that the term Central Bank Digital Currency (CBDC) has begun to get traction and attention of reserve banks and financial and tech lovers alike. A CBDC is a legal tender released by a bank in a digital format. Likewise referred to as digital base money or digital fiat currencies, a CBDC is no different from difficult money, apart from the truth that they are in a digital or virtual form.
It is not meant to change tough money, however coexist as an additional type of payment method. With the development in cryptography and interactions innovation, reserve banks are attempting to create safe computer-code equivalents of the conventional money that can be credited to public accounts – firmly and rapidly– just like conventional cash.
The introduction of CBDC occurs at a time when there is a continuous rise in popularity of cryptocurrencies such as Bitcoin, Ethereum, Tether, Dogecoin and so on. Nevertheless, unlike these personal cryptocurrencies, CBDCs are centralised and legal tenders provided by reserve banks.
RBI and its CBDC
RBI just recently stated that it is working towards a ‘phased’ launch of a CBDC. It believes that the cost of releasing digital currencies is far lower compared with the cost of printing and dispersing tough cash.
Earlier this year, on July 22, while dealing with a conference, RBI Deputy Guv T Rabi Sankar said the new digital currency would reduce our dependence on money and further enable inexpensive and smooth worldwide settlements. He said the RBI-backed currency will protect people from the volatility of the personal digital currencies now functional on the internet.
” Private virtual currencies sit at significant chances to the historic concept of money. Generally, definitely for the most popular ones now, they do not represent any person’s financial obligation or liabilities,” RBI said.
The Indian reserve bank stated it is working towards launching a digital currency at a mass scale. It likewise revealed concern that with the increase in popularity of digital currencies, individuals might withdraw cash from their checking account.
” If banks begin to lose deposits over time, their capability for credit development will get constrained,” RBI said.
The US just recently said it would launch five pilot programs over the next year to ‘test the prospective uses’ of a United States CBDC. It is the first such effort in the United States.
CBDCs for a Digital Economy & Federal Government
While the principle of CBDC is still in advancement, it has actually garnered immense interest from organizations and governments alike; with efforts such as the ones being undertaken in the US (Digital Dollar), China (Digital Yuan), Sweden, New Zealand and elsewhere. Apart from being a system of effective retail payments, CBDCs can help federal governments much better control illicit payments and tax evasion (presuming the reserve bank tracks payments in a database). This can also assist governments fight cash laundering and terror funding.
A digital currency shall also help federal governments in the fast transfer of public funds or emergency grants in a crisis situation (similar to the Covid-19 pandemic). Payments used CBDCs can also lower the concern of settlement risk on the financial system.
However a crucial success aspect for the adoption CBDC would be its efficient combination with the existing banking and payment applications to ensure flawless operations. The simplified regulative and supervisory requirements of the digital system will also help federal governments decrease operational and technological upkeep expenses substantially.
Types of CBDCs
CBDC are generally of two types:-.
Account-based: An account-based CBDC works just like a regular deposit account. It is likewise known as the reserve bank electronic money. Much like our regular savings account, a user is needed to set up an account, following which s/he can perform deals, including sending and getting of the digital currency.
Digital tokens: The token-based system of CBDC includes the transfer of an object of worth from one wallet to another.
Dangers & Opportunities
The worry is that in the lack of the best policy framework, CBDCs could potentially compromise the banking system in the long run by denying them access to deposits and earnings. CBDCs may also pose a threat from a cyber-security viewpoint. Further, in countries with low monetary literacy, the reliance on a digital type of payment might substantially lead to an increase in scams and financial criminal offenses.
Additionally, for an economy to depend on a virtual currency, it would require much deeper penetration of high-speed Internet and telecommunication services.
Looking at the brighter side, unlike physical cash, a digital currency will be a lot easier and less expensive to track and eventually lead to an efficient, regulated and legal tender-based payment system. It will make sure that the transactional currency of a country stays constant, and outliers can be identified.
A much easier way to track such a currency will also help in tracking unaccounted cash in the economy, thus potentially leading to the inclusion of more people into the tax system. A contemporary digital payment system will also help settle interbank gross settlements in near real-time, conserving consumers the hassles of later dates, according to the Bank for International Statements.
The power depends on the application!
( The author, Samrat Kishor, is a Tech Technique Specialist & Entrepreneur, Golden Next Ventures. The views are his own)
( Disclaimer: The viewpoints expressed in this column are that of the author. The truths and viewpoints revealed here do not show the views of www.economictimes.com)