Challenges of digital currency. Finance Minister Nirmala Sitharaman advocated the establishment of a digital currency by the Reserve Bank of India (RBI) in the coming fiscal year in the Union budget 2022-23. The announcement comes after central bank officials told the RBI’s main board about a pilot initiative to begin a (CBDC) central bank digital currency. CBDCs have already been implemented in various nations in some form or another.
For example, the Bahamas’ central bank introduced digital money in 2020. An increasing number of central banks worldwide are investigating the viability, utility, and value of digital currencies. Japan, China, Singapore, and Sweden are all investigating the many aspects of such a shift. The US Federal Reserve produced a paper a few days ago describing the costs and benefits of launching a central bank-backed digital currency.
CBDCs are essentially virtual/electronic versions of fiat currency. With the rapid rise of cryptocurrencies, the growing popularity of blockchain technology, and the benefits that many claims come from their use, their attractiveness or interest in issuing them has gained traction. Advocates of CBDCs claim that they will accelerate financial inclusion, lower financial transaction costs, particularly for cross-border transactions, the advantages of an alternate payment system, the creation of another tool in central banks’ monetary policy arsenal, and the likely adverse impacts on corruption and money laundering, among other things.
However, depending on the economic situation in each country, the extent to which these benefits are realized will differ. On the other side, there are several potential dangers linked with the use of CDBCs. There are obvious ramifications for the banking sector if retail CBDC accounts are interest-bearing. Depositors may also opt to migrate away from commercial banks during periods of great uncertainty, triggering financial turmoil. Then there’s the issue of whether CBDCs can provide the same level of privacy as cash.
T Rabi Sankar, the RBI’s Deputy Governor, recently stated that the central bank is “working towards a phased implementation plan” and that CBDCs in the wholesale and retail segments will be examined. While some gains may accrue at the wholesale level, as various economists have pointed out, the major shift, as well as the challenge, occurs at the retail level. The central bank must carefully consider the benefits and drawbacks in light of the broader economic ramifications. It must proceed with caution, keeping in mind the many difficulties, design concerns, and ramifications of the digital currency’s launch.