8 Central Bank Digital Currency: A Future of Digital Wallet

Central Bank Digital Currency: A Future of Digital Wallet By: Dhruv Parikh (Narayana Business School)

What is Central Bank Digital Currency:

As and when time is evolved on contrary money also evolved like in the ancient India where for the transaction purpose, Barter system was available after that Coins like aluminum and gold coin was used after that Cash and coins followed by NEFT,RTGS,SWIFT and than comes digital wallet and UPI and Now what it was trending is Central Bank digital currency (CBDC). CBDC recently emerged as debatable topic amongst community of people belong to or have some interest in Economics and Finance field .CBDC is an electronic form of country’s currency (In India we can say Digital Rupee, In US-Digital Doller) that citizen can use to make digital payments. CBDC is issued only by central bank of respective country and it is universally accessible. Talking about India in the recent Union Budget presented on 1st February 2022 by our Honorable Finance Minister Nirmala Sitaraman ji also mentioned that central bank, institutions and government are doing research and analysis on introducing a new form of digital money and its impact on country’s Monetary policy and Fiscal policy.

Why CBDC is comes in news again and again?

As we know that from past many years especially from the covid times Crypto currencies has wider their scope in financial market as crypto’s in India not legal and it was not for the payments of goods and services but Crypto Currencies are available as Investment purpose In India. But when talking about Crypto currencies they do not have any regulator also there is no data set of transaction like who give how many cryptos to whom? So due to this it will create a dark room where no one can able to see each other and there is possibility that Crypto currencies might be use for unethical purpose which in turn harmful for country’s financial, economic and Security purpose. Due to which Central bank was realized that they need to enter in digital currency space otherwise if private players become dominant it will very difficult for central bank to control country’s financial system.

Also Crypto market sometimes extremely volatile and due to no regulator for crypto market sometimes investors suffering from massive loss, so to protect the citizen’s money this CBDC concept was evolved. So on contrary while CBDC is legal by Government and regulated by Central Bank meaning anyone can use them for buying good and services.

How CBDC Work?

Like what we used to for cryptocurrencies a underlying distributed ledger technology to create digital ledger, in simple terms A blockchain technology will help in proper management of CBDC. Also In India Respective filed expert is analyzing pros and cons and all the in and out of Block chain technology so it will be better and protecting version of CBDC in India.

Types of CBDC:

Talking about types of CBDC there is mainly 2 types of CBDC. 1) Retail CBDC: As name suggest Retail CBDC is used by individual person through mobile application or whichever technology will evolved which will denote their balances and transaction history. 2) Wholesale CBDC: Wholesale CBDC is used by financial institutions or for Banks who have deposits in Central bank of a country, it is used for inter organization payments we can say B2B payments.

Tier of CBDC:

There is two types of Tier in the CBDC system. 1)One tier: In this type there is no role of Commercial banks, account holder need to have account directly with central bank of a country,so by doing this RBI can monitor each and every transaction whenever they want. There is no Middle Institute is involved. It will disrupt the banking system 2)Two Tier:-While talking about two tier there is a involvement of Commercial bank where account holder need to have account with commercial bank as finance intermediary, so it will be not disrupt banking system but Central bank has the authority to monitor all about Digital currency.

Advantages of Establishing Digital Currency:-

1)Monetary policy transmission: It is very easy for Central bank can track how much money is floating in an Economy or a country. 2)Control tax avoiders: In a country like India where too few people is paying tax due to which the income for government is very less by establishing CBDC RBI can watch or track that what is the actual income and expenditure of a person. Help in preventing big scam and big correction in an economy. 3)Protection of Money: In past many years we saw that commercial bank become bankrupt it will result in the people loose their money or their money which they gave to bank and now their value of money become zero. So by establishing CBDC people are aware about that their value of money is safe.

4)RBI is incur around 4000 Crore to 5000 Crore by printing the money and every country central bank also incurring near by value so by issuing CBDC country’s central bank can save the cost.

Disadvantages of Establishing CBDC:

1)Raise Privacy issue: As Central bank of a country can monitor each and every transaction it will raise the privacy issue also a strongest security layers failed against hacker due to new innovation in technology also comes with loopholes in the same, so sometimes it might be possible that hacker can steel the data and sell it in dark market.

2)Disrupt Banking system:-If Central bank do not want much more complexity and make it easy for them, they will apply one tier CBDC by doing that there is no more importance is exist for commercial bank it will create more and more unemployment. Suppose even though Central bank

establish two tier CBDC system in which also Central bank has major role as protection of money is the responsibility of Central bank.

Research and development in CBDC:

Currently 87 countries are exploring CBDC some of them already established the CBDC system. Above is the tracking of progress of CBDC in the world. Left hand side are the legends and particularly talking about India is one of the 16 countries who are in development phase.

Conclusion:

CBDC become reality soon. Introducing CBDC help in boosting economic growth and platforms for more transparency. It will become one of the main concept in Finance and Economic field and it is a future of Finance. One of the key advantage of CBDC in comparison to Crypto currencies is CBDC have regulator and that is Central bank of the country and every central bank will always take steps which will expand the growth of the country.

Reference

1. https://www.atlanticcouncil.org/cbdctracker/ 2. https://economictimes.indiatimes.com/topic/central-bank-digital-currencies 3. https://www.atlanticcouncil.org/cbdctracker/

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