RBI Wants to Leverage Blockchain Technology Powering the Crypto World (Representative)
As more people weigh their options to invest in crypto coins, the central bank digital currency (CBDC) debate is gaining traction. Authorities around the world are exploring the possibility of launching their own crypto coins backed by the country’s central bank or reserve. But why is there a need to do this? There are already thousands of crypto coins in circulation, including the most famous ones like Bitcoin, Ethereum, etc. One of the main reasons that a central bank (e.g. the Reserve Bank of India) thinks about having its own crypto is the uncertainty about the privately held ones Coins.
As the debate heated up, the RBI had made it clear that it was against private crypto coins and was looking for ways to issue its own coin. RBI wants to leverage the blockchain technology that powers the crypto world to offer a secure, robust and convenient alternative to cash.
In December last year, the RBI said it was in favor of initially introducing a basic CBDC model and using the country’s payment system architecture as the backbone to 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, she added.
Similarly, the US Federal Reserve also published a paper examining the “pros and cons” of a possible CBDC. The paper noted that as the payment system evolves, a CBDC could provide a secure, digital payment option for households and businesses and could also lead to faster payment options between countries. However, it added that there could also be downsides.
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 is passed from one ledger to another only in the form of data and not physical money. What if we could send real money over the internet? This is how CBDC can help the RBI. With CBDC, users would be able to transact with actual “digital” money and therefore would not need an intermediary.
2) Reduces costs
With a CBDC, the central bank can reduce the costs of printing and distributing money. It is also efficient and makes tracking the money trail easier.
3) Payment method
People see crypto as an asset and therefore invest in it in droves, believing that these coins will eventually bring them a windfall. On the other hand, CBDC is likely to be viewed as a means of payment, similar to fiat money.
However, there are also fears that CBDCs could disrupt the current financial system, which relies primarily on banks to facilitate trade and transactions. Central banks also fear that their role as custodian or guarantor of money in circulation would be diminished by cryptocurrency.
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