India’s Central Bank Digital Currency (CBDC): A Leap towards Digital Economy

As an emerging market and one of the fastest-growing economies in the world, India’s needs are changing. With more focus on the digital economy, an Initiative towards the future has been made and it has become the driving force towards the growth of India.

One such initiative by the Reserve Bank of India (RBI) which is in trial form is the digital currency. RBI decided to launch its own digital currency or Central Bank Digital Currency (CBDC) in December 2021. This initiative can instantly transform India’s economy and create a multitude of opportunities for the youth.

The digital economy has grown multiple times since its introduction with now having over 15.5% of the world’s GDP.  In this article, we will discuss what is Central Bank Digital Currency, what are its advantages and disadvantages, and much more.

What is CBDC?

Central Bank Digital Currency is a digital form of the same fiat currency. The value of this currency is the same as the rupee banknote. Traditionally, a customer used to deposit currency to the bank for which his or her account was credited but, with digital currency, with just a click you can transfer your money wherever you want.

Depositing your money used to take a lot of time but with digital currency, you can instantly buy the currency from a bank online. This change has a lot of benefits that can fuel the growth of India’s economy but it has its challenges as well. So below, we have discussed what are the advantages and disadvantages of CBDC.

Advantages of CBDC

The following are the advantages of CBDC-

  • The biggest advantage of CBDC is that it is an inclusive system of currency. You do not need to have a bank account to use digital currency.
  • With e-currency, contactless payments can be easier.
  • This type of currency can be tracked easily meaning no more tax evasion.
  • Managing and distributing the currency can be cheaper than the traditional format of currency. For example-Rs.1 coin’s manufacturing amount is Rs.1.11/- which is expensive than the value of the coin itself.  
  • The e-currency will have legal recognition as a valid method of payment.
  • It has a high level of credibility because its e-currency is issued by the central bank and the central bank can never run out of cash it issues.

Disadvantage of CBDC

The following are the disadvantages of CBDC-

  • The biggest challenge with CBDC will be cybersecurity. With an increase in dependence on technology, cyberattacks can be a more common theme in the future which can be troublesome.
  • CBDC will be held on the balance sheet side of the bank which means this e-currency will always be a debt instrument for the bank and pose a credit risk.
  • Additional liquidity will be needed by the banks to manage the customers.

Digital Currency Vs Cryptocurrencies

Cryptocurrencies are yet another e-currency but the highly de-centralized meaning there is no central authority when it comes to issuing and managing the currency. But, digital currency is a centralized currency issued and maintained by the central banks.

Now, cryptocurrencies might seem an attractive option but there is an inherent risk involved with buying cryptocurrency. It is a highly volatile currency that could make you win and lose within seconds.

Crypto and e-currency both use the same technology of blockchain networks to send and receive payments but, the major difference being the ability to authorize the transaction. In crypto, there is no central authority to authorize the payment rather it uses an algorithm.

Digital currency or e-currency will always be authorized by the  Central Bank or RBI which adds credibility to the currency.

Conclusion

Digital currency is the new future that we are going towards and embracing the technology at right time is the key to success. There are already 5 countries that launched their own e-currency and this list includes china as well. With over 81 nations still in the pipeline process to launch their own version of e-currency, this technology is the future.

India being an emerging economy and one of the leading heads when it comes to digitization has a major stake in the global digital economy. CBDC is a new system that has huge potential to become the mainstream system for the world because of the benefit it has to offer. A recent report from U.S intelligence states that India could become an economic superpower by 2030 and technological advancements like e-currency can be a step towards that goal.