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What are the benefits of Central Bank Digital Currency? Finance Ministry answers

More robust, efficient, trusted, regulated and legal tender-based payments option is one among the many benefits of CBDC according to Finance Ministry.

Reduced settlement risk, more efficient payment option, and higher seigniorage are among the benefits provided by Central Bank Digital Currency (CBDC), the Ministry of Finance said in the parliament. The statement was made in response to a question posed by Lok Sabha MP Rakesh Singh on December 6. The Ministry also said that it has received a proposal from the Reserve Bank of India for CBDC.

Why this matters? The Cryptocurrency Bill is expected to be introduced in this session of the parliament  and while we do not have a clear picture on how the Bill will regulate private cryptocurrencies, it is widely expected to provide a framework for CBDC. The benefits laid out by the Finance Ministry can serve as a good indication on what the proposed framework might look like.

What are some of the benefits of CBDC?

According to the Finance Ministry’s response, CBDCs provide the following benefits:

  1. Reduced dependency on cash
  2. Higher seigniorage due to lower transaction costs (seigniorage is the profit made by a government when issuing currency, calculated as the difference between face value of coins and production costs)
  3. Reduced settlement risk
  4. More robust, efficient, trusted, regulated and legal tender-based payments option
  5. Will not have volatility which is normally associated with private cryptocurrencies

Despite these benefits, there are associated risks which need to be carefully evaluated against the potential benefits, the ministry added in its response.


What purpose will a CBDC serve in India for users? Leave a comment


 

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What proposal has RBI put forth for CBDC?

When asked if the government proposes to start digital currency in the country, the Finance Ministry responded:

“Central Bank Digital Currency (CBDC) is introduced by a Central Bank. Government has received a proposal from Reserve Bank of India (RBI) in October, 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of “bank note’ to include currency in digital form. RBI has been examining use cases and working out a phased implementation strategy for introduction of CBDC with little or no disruption.”

Full text of the question and answer

Will the Minister of FINANCE
be pleased to state:

(a) whether the Government proposes to start digital currency in the country;
(b) if so, the details thereof;
(c) the details of its practicability and utility in banking transactions;
(d) whether digital currency is completely safe and there is no possibility of its
misuse:
(e) whether the said currency is on alternative for the popular crypto currencies ; and
(f) if so, the details thereof?

ANSWER

MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI PANKAJ
CHAUDHARY)

(a) & (b):
Central Bank Digital Currency (CBDC) is introduced by a Central Bank Government has received a proposal from Reserve Bank of India (RBI) in October, 2021 for amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of “bank note’ to include currency in digital form. RBI has been examining use cases and working out a phased implementation strategy for introduction of CBDC with little or no disruption.

(c) & (d):
Introduction of CBDC has the potential to provide significant benefits, such as
reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced
settlement risk. Introduction of CBC would also possibly lead to a more robust, efficient,
trusted, regulated and legal tender-based payments option. There are also associated risks
which need to be carefully evaluated against the potential benefits.

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(e) & (f):
As CDC is backed by the Central Bank of a country, apart from other benefits, it will not have volatility which is normally associated with the private cruptocurrencies
******

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