Central Bank Digital Currency (CBDC)
CBDC refers to a digital form of currency issued by a central bank. Unlike cryptocurrencies (such as Bitcoin), CBDC is backed by the central bank and operates within the existing regulatory framework. The primary objective of CBDC is to provide a digital alternative to the physical currency, i.e., banknotes and coins, and to enhance efficiency, security, and accessibility in payment settlements.
Policy Implications in India
The Reserve Bank of India (RBI) has been actively exploring CBDC, referred to as e₹ (digital Rupee). Here are the policy implications specific to India:
Monetary Policy:
CBDC can impact the effectiveness of monetary policy transmission.
RBI needs to balance CBDC issuance with its impact on interest rates, money supply, and inflation.
Liquidity Management:
CBDC affects the liquidity position of banks.
RBI must manage CBDC issuance to maintain stability in the banking system.
Financial Stability:
CBDC can influence financial stability by altering the demand for bank deposits.
RBI needs to assess potential risks to the banking sector.
Legal Implications:
Legal frameworks must be updated to accommodate CBDC.
Clarity on legal status, rights, and obligations related to CBDC is crucial.
Balance Sheet Implications:
CBDC impacts the central bank’s balance sheet.
RBI must manage the impact on assets and liabilities.
AML/CFT Perspective:
Ensure compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations.
Privacy and Data Protection:
Balancing privacy concerns with transaction transparency.
Key principles and considerations for CBDC in India:
1. Non-disruption: The CBDC when issued by the RBI should in no way interfere with the overall public policy objectives of the government. It should, in effect, maintain the integrity and uniformity of the Indian currency and let the general public use all forms of Indian currency interchangeably.
2. Coexistence: The CBDC should coexist or complement the other existing forms of currency, including cash and settlement accounts. It should also coexist with all commercial bank accounts and work in harmony with fiat currency and in no way push for replacement of the physical currency.
3. Innovation and competition: The CBDC ecosystem, once introduced, should continuously innovate and boost its overall efficiency through healthy competition with the other existing set of digital payment systems, so that the average user in a country like India, which has a plethora of instruments, some of which are less safe than CBDC, still adopts CBDC as their preferred mode of transaction in day-to-day activities.