CENTRAL BANK DIGITAL CURRENCY (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     7th May 2024        

Context: The Reserve Bank of India (RBI) may start a pilot programme for the wholesale segment of Central Bank Digital Currency (CBDC) in commercial papers (CPs) and certificates of deposits (CDs).

Central Bank Digital Currency (CBDC)

  • About: It represents a legal tender and is a liability of the central bank, with its value denominated in the nation's currency, reflected on the central bank's financial statement.
  • Objective: To reduce risks and minimize expenses associated with the management of physical currency, including the costs related to replacing worn-out notes, transportation, insurance, and logistical operations.
  • Fiat Currency: CBDCs hold the same value and function as fiat currency, maintaining a one-to-one exchangeability with traditional paper money.

oFiat currency is a national currency devoid of commodity backing, such as gold or silver, relying solely on government regulation and trust.

  • Transaction Medium: CBDCs are transacted through blockchain-backed wallets, facilitating digital transactions in a secure and decentralized manner.
  • Inspiration: CBDCs, while initially inspired by Bitcoin, differ significantly from decentralized virtual currencies and cryptocurrencies because they are government-issued and carry the legal status of 'legal tender.'

Commercial Papers (CPs)

  • About: It is an unsecured money market instrument issued as a promissory note, introduced in India in 1990.
  • Purpose: It aimed to allow highly rated corporate borrowers to diversify short-term borrowing sources and offer investors an additional instrument.

Certificate of Deposit (CD)

  • About: A CD is a specialized savings account offering a fixed interest rate for a predetermined duration.