- What is central bank digital currency (CBDC)? How does it work? CBDC is slowly gaining momentum and acceptance across the world. Discuss its potential benefits and challenges in India.
Central bank digital currency (CBDC) is a digital form of central bank money that can be used as a legal tender or a digital representation of fiat currency issued by a central bank. CBDC is designed to be a safe, secure, and reliable form of payment that can be used by individuals and institutions for everyday transactions.
There are two types of CBDC: retail CBDC and wholesale CBDC. Retail CBDC is designed for use by the general public and is intended to replace physical cash. Wholesale CBDC is designed for use by financial institutions and is used to settle large value transactions between banks and other financial institutions.
CBDC works by using a distributed ledger technology (DLT) such as blockchain to record transactions and maintain a tamper-proof ledger of all transactions. This technology allows for the secure transfer of digital currency from one account to another without the need for an intermediary.
Potential benefits of CBDC in India include:
- Financial inclusion: CBDC has the potential to provide access to banking services to the unbanked and underbanked population, as it is not dependent on the traditional banking system.
- Reduced transaction costs: CBDC can reduce the transaction costs associated with cash transactions, such as the cost of printing and handling physical currency.
- Improved efficiency: CBDC can improve the efficiency of payment systems and reduce the settlement time for transactions.
- Enhanced transparency: CBDC can provide greater transparency in the financial system, as all transactions are recorded on a tamper-proof ledger.
Challenges associated with the implementation of CBDC in India include:
- Security risks: The implementation of CBDC requires a robust cybersecurity infrastructure to ensure that transactions are secure and protected from cyber threats.
- Privacy concerns: The use of CBDC raises privacy concerns, as all transactions are recorded on a public ledger, which could potentially be accessed by third parties.
- Operational challenges: The implementation of CBDC requires significant investment in infrastructure and technology, which may pose operational challenges for the central bank.
- Adoption challenges: The adoption of CBDC may face challenges