A new form of money has been gaining tremendous fame. People have made millions or lost millions because of it. Can you guess which new currency we are talking about? Yes, it's cryptocurrency. Along with crypto, lots of digital assets have sprung to life and are making an impact on the way money moves.
In the recent Union Budget, the government of India announced its very own digital currency. The Central Bank Digital Currency, or CBDC, was introduced in India within this ongoing fiscal year.
Let us answer the following three things about CBDC
1. What exactly is CBDC?
2. Have other countries implemented this? And
3. What are some of its challenges when it comes to the implementation of CBDC.
Definition: It is a legal tender and a central bank's liability in digital form appearing on the balance sheet but this sounds a little complicated doesn't it. yes so a legal tender means that is recognised currency basically it is another variant of fiat money or currency, which central banks traditionally issue just like how RBI issues currency notes of rupees 500, 1000, 2000 etc.
They will also now issue digital currencies and that's called CBDC. its currency but digital many people confused it with cryptocurrencies after the announcement but the challenge with cryptocurrencies have always been there is no regulatory authority to have control over it and that's why they are very volatile in nature that's where CBDC has an edge over it.
Right now only commercial banks or certain financial institution have access to central banks money RBI deputy governor said that it is being done in a gradual manner CBDC can take stew from broadly, First is the wholesale CBDC this type of CBDC is going to be used for inter bank payments like from RBI to banks or even within the banks themselves.
Second is the retail CBDC this is for chandler public it is a token that can exist alongside physical cash and commercial banks money RBI in the past have cautioned against the use of cryptocurrencies in chantal.
However taking the note of rapid development happening in that field of digital and cryptocurrencies the RBI has stated that it is working on the need to introduce the digital currency in india.
Well the first CBDC that covered an entire nation was the sand dollar from the central bank of bahamas it was launched in october 2020.
Exactly a year after the sand dollar the eNaira from Nigeria become the first african CBDC it's stored in digital wallet and can be used to make payments at store or transfer money between peers.
Seven eastern caribbean union countries have also developed their own CBDC. Sweden, China and Jamaica are currently developing their own CBDC for Canada, UK and US.
CBDC are still in research they have no timeline dictating the development as of yet for india as we mentioned it is currently under development.
According to the finance minister it will help to strengthen the economy and lowered the expenses of country's currency's management system as for its purpose Nirmala sitaraman said the government and RBI are looking into several commercial use purposes and not just financial inclusion.
Of course there are some challenges when it comes to the implementation and utility first the cyber security risk and the high cost of government for protecting and testing. Second there is always a chance of compromising your credentials finally the intermediary banks will take a hit once CBDC is on a large scale these challenges are quite evident.
So obviously the central bank will be working on overcoming them it will be interesting to experience this fascinating transition between our current currency and central bank's digital currency.