Blockchains to Host Central Bank Digital Currency (CBDC)
The Central Bank Digital Money (CBDC) is a digital representation
of a country's fiat currency that is stored on a blockchain or other
Distributable Ledger Technology (DLT) platform. According to an internal
circular dated January 7, 2022, India's central bank, the Reserve Bank of India
(RBI), has established a new fintech department. According to the circular, the
unit would be the point of contact for all fintech-related initiatives at RBI.
A digitised
form of a country's fiat money, such as the Indian Rupee, the US Dollar, or
other legal tender, is CBDC. The country's central bank will be in charge of
CBDC supply and distribution. The information about CBDC transactions will be
kept on a publicly accessible digital ledger (DLT). Some individuals believe the
DLT will be based on blockchain, which is currently the best available DLT
technology. Even if the data is maintained on
a blockchain, it will be a centralised blockchain because most countries'
currency issuing authority is their central bank, and central banks will always
desire complete control over the supply and distribution of the money they
issue.
Governments
all over the world are debating the variables that make CBDC an effective tool
for enacting better fiscal and monetary policies and bringing more people into
the formal sector. These factors are also being considered by the Indian
government. RBI is undertaking an in-depth investigation into CBDC's underlying
technologies. The central bank has developed a new and specialised department
for this purpose, as well as to foster future fintech innovation and
development.
India has the
potential to bring more individuals into the formal sector and hence improve
access to finance. According to a State Bank of India economic study paper,
India's informal economy has decreased to roughly 20% of the formal economy,
down from 52 percent before the introduction of GST. Several industry stakeholders expect CBDCs to shrink this number further as more
people transact on digital platforms using digital currency.
People's
purchases and sales can be tracked using CBDC digital ledger entries.
Therefore, increased usage of digital currency instead of cash can alleviate
the problem of indirect tax evasion to a large extent. Because all CBDC
transactions will be recorded using DLT technology, money laundering and the
use of black money will be eliminated.
There is no
risk of the counterparty defaulting because CBDC transactions are resolved
quickly in real-time. This will also help to build a future ecosystem in the
country, allowing for more secure retail and wholesale payments. Axis Bank, for
example, recently completed a transaction in which the payment was made in fiat
money, yet the transaction took place on the blockchain.
India's
administration is known for promoting a variety of populist policies in order
to placate its voter base. Direct Transfer Benefits (DBTs), such as LPG gas subsidies
and other government flagship initiatives, can be handled more efficiently with
blockchain technology. According to a poll conducted by NABARD, people in rural
India are still hesitant to register bank accounts, so the cash transfer will
be effective CBDC in place.
CBDCs can
also assist governments in preventing illegal payments and tax evasion, as well
as money laundering and terror financing. It can also facilitate the
transfer of public cash or emergency grants while minimising the financial
system's settlement risk.
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