Published on: October 10, 2022
why in news?
The Reserve Bank said it will soon commence the pilot launch of e-rupee for specific use cases as it tests digital currency in India.
concept note on Central Bank Digital Currency (CBDC)
- The concept note discusses key considerations such as technology and design choices, possible uses of the digital rupee, and issuance mechanisms, among others.
- It examines the implications of the introduction of CBDC on the banking system, monetary policy, and financial stability, and analyses privacy issues.
What is a Central Bank Digital Currency?
- A CBDC is no different from the cash that we hold in our wallets, except that it exists in a digital form.
- The CBDC will be held in a digital wallet that is supervised by the Central bank.
- In India, it will be the RBI that supervises the digital rupee although it may delegate some power to banks.
- However, it does seem probable that the RBI will take steps to encourage the use of its digital currency over physical cash. It should be noted that the RBI’s digital rupee will not directly replace demand deposits held in banks.
- Physical cash will continue to be used by banks, and people who wish to withdraw cash from banks can still do so. But they can also opt to convert their bank deposits into the new digital rupee.
What are the risks in adopting digital currencies issued by Central banks?
- people may begin withdrawing money from their bank accounts as digital currencies issued by Central banks become more popular. many people currently use bank accounts to safely store their cash. When the digital wallet offered by the RBI can serve the same purpose, people could very well begin converting their bank deposits into digital cash.
- This may not be an immediate concern for banks in India which still offer returns that are positive, at least in nominal terms, to their depositors.
- The withdrawal of bank deposits can also affect the amount of loans created by banks
What lies ahead?
- There is speculation already that Central banks will cap the amount of money that an individual can hold in the form of CBDCs. This is to prevent the mass withdrawal of deposits from banks. Some even believe that some Central banks, such as the European Central Bank, may impose a negative penalty on their digital currencies. This could be done to force people to spend their digital currencies and to discourage the withdrawal of deposits from banks that impose negative interest rates.
- Central banks may also have to inject fresh money into banks to ensure that the ability of banks to create loans is not affected by depositors’ rush to digital currencies.