CBDC in India: What is Central Bank Digital Currency (CBDC)?
The Government of India listed 23 bills to be tabled in the Lok Sabha during the upcoming Monsoon Session of the Parliament. However, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is not listed in the Lok Sabha bulletin.
Earlier, as per Lok Sabha Bulletin Part II, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was to be introduced by the Government of India to ban trading and investments in private crypto-currencies such as Bitcoin during the Budget session of the Parliament and to provide the Reserve Bank of India (RBI) with the legal powers to develop CBDC.
On 25 January 2021, the Reserve Bank of India (RBI) stated that it is examining if there's a need to introduce Central Bank Digital Currency (CBDC) in India. In case, the need for a digital currency arises, the bank will look for ways to operationalise it.
In its February 2020 Bulletin, RBI cited the survey of central banks conducted by the Bank for International Settlements which revealed that around 80% of the 66 responding banks have started projects to explore the use of CBDC, including Canada, USA and Singapore.
In 2019, a draft bill was prepared by Finance Ministry committee on virtual currencies which banned crypto-currency issuance, trading, investment and other activities in India a punishable offence with fine of up to ₹25 crores or with an imprisonment term of one to ten years, or both. However, this legislation was never approved by the Indian Parliament.
In 2018, RBI banned financial institutions from dealing with the cryptocurrencies, leading to the shutdown of such platforms. However, the decision was revoked after a Supreme Court order in March 2020 that allows operations revolving around cryptocurrencies to restart in India.
What is Central Bank Digital Currency (CBDC)?
Digital currencies or cryptocurrencies are gaining popularity across the world. This has made most central banks look at launching a digital currency controlled by them to address their shortcomings while hastening the shift towards a cashless society.
The Central Bank Digital Currency (CBDC) is a legal tender and liability of a nation's central bank in the digital form. It is denominated in a sovereign currency and appears on the balance sheet of a nation's central bank.
CBDC is a digital currency which can be converted/exchanged at par with similarly denominated cash and traditional central bank deposits of a nation.
In February 2019, the Finance Ministry's committee propose the idea of introducing a Digital Rupee.
Types of CBCDs:
1- Retail: Retails CBCDs are meant for use by individuals, households and corporations.
2- Wholesale: Wholesale CBCDs are meant for use by financial institutions.
Significance of CBDC:
The Reserve Bank of India (RBI) stated that the innovations have been rapidly changing the payments space and this has made central banks across the world examine whether they could leverage on the technology and issue fiat money in the digital form or not. Recently, RBI indicated that it is conducting a feasibility study on the development of a government-backed digital currency.
Benefits of CBDC:
At present, central banks of various nations are currently examining the positive implications that a digital currency contributes to financial inclusion, economic growth, technology, innovation and increased transaction efficiencies.
1- Real-time money transfer: Money transfers and payments can be made in real-time from the payer to payee without relying on intermediaries such as banks.
2- Easy tracking of currency: With the introduction of CBDC in a nation, its central bank would be able to keep a track of the exact location of every unit of the currency.
3- Income Tax: Tax avoidance and tax evasion will be near to impossible as methods such as offshore banking and unreported employment cannot be practised to hide financial activities from the central bank.
4- Curbing Crime: Criminal activities can be easily spotted and ended such as terror funding, money laundering, and so forth.
5- Alternative to physical cash: Digital currencies issued by central banks would provide for a modern alternative to physical cash.
6- Seigniorage income: Issuance of digital currency would avoid a reduction of seigniorage income for governments in the event of the disappearance of physical cash.
Seigniorage income refers to the difference between the value of money and the cost to produce and distribute it.
7- Volatility: CBDCs will be pegged to assets such as gold and thereby will not witness any volatility as in the case of cryptocurrencies.
Need for CBDCs in India:
In May 2020, China started testing its Digital Yuan-- Digital Renminbi (RMB). Several other nations have also started research and pilot projects related to CBDC such as Canada, USA and Singapore. Also, China and USA are battling to gain the supremacy across markets with the introduction of new-age financial products and India may get caught up in this digital proxy war.
Furthermore, there's a wide disconnect between the number of bank accounts and mobile phone connections in India, and CBDC can possibly bridge this gap.
1- The Digital Rupee provides India with the opportunity to establish the dominance of Digital Rupee as a superior currency for trade with its strategic partners, thereby reducing its dependency on the dollar.
2- It will also help India in addressing the malpractices such as tax evasion, terror funding, money laundering, etc., as the central bank can keep a check on every unit of the digital currency.
3- CBDC will empower RBI to control monetary policies. These effects of monetary policies can be immediately reflected instead of relying on commercial banks to make changes when they deem fit.
4- It will also empower RBI to monitor transactions and credit flow across the Indian economy, weeding out scams, frauds instantly, thereby protecting depositors' money.
5- CBDC will also help in distracting the investors from investing in the current crypto assets that are highly risky.
6- It will also turn every large technology company in a fintech company nullifying the need for permission or partnership with a bank. It will create incentives for the companies and provide financial assistance to those who have been at the mercy of banks.
7- It will also make loans, insurance, stocks and other financial products a natural extension using programmable smart contracts.
Digital Proxy War:
The Dollar has been unchallenged as the world's reserve currency, giving the US an advantage over the world's financial system, enabling it to impose sanctions against other nations. In view of the recent trade war with the US, China is pushing for a more advanced financial system using Digital Renminbi (RMB).
The Digital Rupee will help RBI in achieving financial inclusion, shift to a cashless society, reducing the cost of printing and handling cash. Thus, there's a need for the introduction of a Digital Rupee as it will not only empower the citizens but will also enable them in expanding digital economy, putting an end to the current banking system.