RBI wants to use the blockchain technology that powers the crypto world (representative)
As more people weigh their options for investing in cryptocoins, a debate about central bank digital currency (CBDC) is gaining traction. Authorities around the world are exploring the possibility of launching their own cryptocoins backed by the country’s central bank or reserve. But why is this necessary? There are already thousands of crypto coins in circulation including the prominent ones like Bitcoin, Ethereum etc. One of the main reasons for a central bank (e.g. the Reserve Bank of India) to consider own crypto is the uncertainty about the privately owned coins .
As the debate heated up, the RBI had made it clear that it was against private cryptocoins and was looking at ways to issue its own coin. RBI aims to leverage the blockchain technology powering the crypto world to offer a secure, robust, and convenient alternative to cash.
In December last year, the RBI said it advocated first adopting a baseline model of CBDC and using the country’s payment system architecture as the backbone for the transition to a state-of-the-art CBDC system. With a baseline model, the transition will be smooth and with minimal impact on monetary policy and the banking system, he added.
Similarly, the US Federal Reserve has also released a paper examining the “pros and cons” of a potential CBDC. The paper noted that a CBDC could provide a secure, digital payment option for households and businesses as the payment system evolves, and could also lead to faster payment options between countries. However, it added that there could be downsides as well.
Some of the advantages of cryptocurrency are.
1) Removes third-party interference
Currently, when we transfer money from one account to another, the sender’s bank validates that transaction with the recipient’s bank at the end of each day. This means that the amount sent or received traveled from one ledger to another only as data and not as physical money. What if we can send real money over the internet? How CBDC can help RBI. With CBDC, users could trade real “digital” money and therefore would not need an intermediary.
2) Reduces costs
A CBDC allows the central bank to reduce the cost of printing and distributing money. It’s also efficient, making it easier to follow the money trail.
3) Method of payment
People see crypto as an asset and as such invest hordes in it, trusting that these coins will eventually lead them to a windfall. On the other hand, like fiat money, CBDC is likely to be viewed as a means of payment.
But there are also fears that CBDCs could disrupt the current financial system, which relies primarily on banks to facilitate trades and transactions. Central banks also fear that cryptocurrency would diminish their role as custodians or guarantors of the money in circulation.
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