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Central Bank Digital Currency (CBDC)

Central Bank Digital Currency (CBDC):

Reserve Bank of India’s (RBI) digital rupee — the Central Bank Digital Currency (CBDC) — may be introduced in phases beginning with wholesale businesses in the current financial year.

  • RBI had proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a CBDC.
  • Central Bank Digital Currency (CBDC) are a digital form of a paper currency and unlike cryptocurrencies that operate in a regulatory vacuum, these are legal tenders issued and backed by a central bank.
  • It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
  • A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver.
  • The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
  • Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
  • The main objective is to mitigate the risks and trim costs in handling physical currency, costs of phasing out soiled notes, transportation, insurance and logistics.
  • It will also wean people away from cryptocurrencies as a means for money transfer.
  • Bahamas has been the first economy to launch its nationwide CBDC — Sand Dollar.
  • Nigeria is another country to have rolled out eNaira in 2020.
  • China became the world’s first major economy to pilot a digital currency e-CNY in April 2020.
  • Korea, Sweden, Jamaica, and Ukraine are some of the countries to have begun testing its digital currency and many more may soon follow.

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