The Reserve Bank of India recently announced that it will soon be launching the country’s Central Bank Digital Currency (CBDC) in a phased manner.
What does this mean?
CBDC is a legal tender issued by a central bank in digital form. It holds the same value as bank notes that are in your physical wallet, but is kept in a digital wallet instead.
- Since cryptocurrency is all the rage these days, central banks claim that they wish to satisfy the increasing demand for digital currency.
- A regulated digital currency will also save people from the volatility of private digital currencies such as Bitcoin.
- The cost of issuing CBDC is way lesser than printing and distributing physical cash.
- A digital currency that is monitored by the central bank will be easier to track than cash, making it easier to detect frauds committed using the CBDC.
- Payments could be processed instantly through the central bank infrastructure and dramatically reduce the cost of transactions.
How is this different from cryptocurrency?
Cryptocurrencies are private, decentralised assets and operate independently of the government. CBDCs on the other hand are managed by the central government’s monetary authority.
While cryptocurrencies offer anonymity, CBDCs allow central banks to know exactly who holds what.
Some interesting facts:
Digital currencies can be programmed. Just like coupons that you might get for your school or office canteen, CBDC can be designed in a way that it can only be spent on certain items. It can even be designed not to be spent on certain items or activities such as gambling.
Additionally, digital currencies can also be given an expiry date so that money is infused back into the economy faster to keep it growing.
In October 2020, the Bahamas launched the world’s first CBDC called the ‘Sand Dollar’.
Countries such as the United States, the United Kingdom, China, Russia and South Korea are also exploring this domain.