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A Digital Ecosystem – Cryptocurrencies to CBDC

With the accruing use of cryptocurrencies such as Bitcoin and Ether all over the world, a step was taken by RBI to launch a central bank digital currency (CBDC) has been a breakthrough. As informed by T Rabi Shankar, deputy governor of RBI, this will be implemented in a ‘phased manner’.

As of 2020, about 87% of the transactions in India took place through cash. The CBDC will just be a digital form of the fiat currency used in the present time. Initially, there was an ambiguity as there was a thought to legalize cryptocurrencies. But, finally, the plan to have a legal tender, which is a digital form of rupee is an appreciable step.

According to the 2021 BIS survey, as in the RBI Report on the survey of central banks, “86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects.” In fact, countries such as Russia, Japan, China have already started working towards developing their own digital currency.

Many nations around the world are reluctant to use private cryptocurrencies. The reason for this is the anonymity of the transactions and the flourishing underground economy. China’s massive crackdown on cryptocurrencies is a remarkable step as it had already warned its crypto miners about the tightening restrictions.

CBDC vs Cryptocurrency

CBDC would save the general public from the dynamics of cryptocurrencies. They will prove to be beneficial and easy to use as their value will be in accordance with the fiat currency (rupee). In contrast to this, cryptocurrencies have highly volatile values which change dynamically with world politics and economic decisions.

Although the working technology of this currency is not yet very clear it can be assumed to work in a centralized manner as RBI would have control over it. Unlike cryptocurrencies, which work in a decentralized form by establishing a peer-to-peer tender.

Also, the maintenance of anonymity would be a question, as the users might have to reveal their identities. This is possible because the reason behind launching CBDC is to ensure the ethical transaction of money which is not maintained by cryptocurrencies. Recently in news, a ransomware attack targeted on the US information technology firm Kaseya was an attempt by hackers (although an intelligence attack), who demanded payment in Bitcoin.

Pros and Cons

This form of currency would help to reduce the cost of currency management, as said by Rabi Sankar. Furthermore, it will encourage more real-time payments where inter-bank settlement would not be a problem now.

The usage of paper notes requires their storage and proper transporting. The cost of printing paper notes will also be reduced as cash usage would in turn be replaced by CBDC.

According to Mr. Shankar – “Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk.”

Altogether, one of the major needs to have CBDC is to uphold the identity of national currency whose importance could be felt to be at stake with the incoming private currencies, as it had limited interconvertibility. In contrast to this, the impact of the introduction of CBDC could be very varied depending on geographical location and other demographic factors such as age and disabilities.

Furthermore, the dependence of the payment ecosystem would suddenly shift on other infrastructures such as the Internet and telecommunication. Added to this the threat of cybersecurity risk remains exclusively important in this decision.

Overview of the Economy ahead

Also, it is not very sure whether this digital form of currency would be able to take over the cash-laid economy of the country over time. As T Rabi Sankar said, “To the extent, the preference for cash represents a discomfort for digital modes of payment, CBDC is unlikely to replace such cash usage. But the preference for cash for its anonymity, can be redirected to acceptance of CBDC, as long as the anonymity of it is assured.”

Source – NexchangeNow

Conclusion

Altogether, this step can prove to be a remarkable start as the system will become more transparent. Tax collection procedures can be held in a more efficient form through this digital currency. Moreover, crimes like money laundering will not be able to flourish anymore. Hence, this digital ecosystem can ensure a move forward towards the digital economy.

 

Written By – Bhumika Dixit
Edited By – Riya Shah

The post A Digital Ecosystem – Cryptocurrencies to CBDC appeared first on The Economic Transcript.

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