China's digital currency moves

Context: Introduction of digital Yuan or Central Bank Digital Currency (CBDC) by China, its impact on global financial systems and lessons for India

Comparing CBDC and other crypto currencies

• Source: While both are based on blockchain technology, CBDC is issued centrally through banking system, unlike other crypto currencies (like Bitcoin and Tether) where issuance is decentralised.
• Value: The value of the CBDC can be manipulated by State as oppose to demand and supply governing other currency value.
• Distribution: CBDC will be distributed through the existing banking and monetary system just like paper currency, and not mining as in case of Crypto Currency.

Advantages of Digital currencies 

• Improved surveillance: It will enable state to monitor transfers, detect tax evasion, money laundering and other illegal activities.

• Financial Autonomy: Such an ecosystem would bypass US and Western Banking system (SWIFT) reducing western financial hegemony.

• Ease of use and adaptability: Convenience and low transaction costs would attract many other nations. External use of currency can be seen along BRI pursuant countries.

• Convenient financial controls: CBDC can be efficient instrument to deliver stimulus than interest rate manipulation and quantitative easing.

• Bypassing constraints: While Yuan couldn’t serve as alternative to USD due to capital controls, partial convertibility and volatile currency, CBDC offers a possible route to internationalization with minimum loss to severing control.

Implications for India

• India should consider sovereign digital currency in order to make its monetary policy transmission more efficient.
• Implications of CBDC on global financial system and dominant Western system should be analyzed.