Context: 

 Recently, the RBI Deputy Governor observed that Central Bank Digital Currencies (CBDCs) could bring about a substantive change in the sphere of cross border payments.

About the News:

• The Deputy Governor of RBI unveiled the fourth edition of the G20 Tech Sprint.
• It is a global technology competition to promote innovative solutions for improving cross-­border payments.
• Jointly organised by:  RBI and the Bank for International Settlements’ BIS Innovation Hub (BISIH). 

What is CBDC?

• Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central bank.
• CBDCs is a new variant of central bank money different from physical cash or central bank reserve/settlement accounts. 
• That is, it will be a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value.

Features of CBDC:

• CBDC is a sovereign currency issued by Central Banks in alignment with their monetary policy.
• Freely convertible against commercial bank money and cash.
• Fungible legal tender for which holders need not have a bank account.
• Expected to lower the cost of issuance of money and transactions.
• Payments effected through CBDC would be instantaneous and final
• Reduced reliance on clearing corporations and other settlement infrastructure could cut down energy consumption.

Implications of CBDC:

• Implications on Financial Stability
  • Potential demand for a CBDC is highly uncertain. It would be affected by its design and implementation framework.
  • In times of financial crisis, CBDC may hypothetically result in faster bank runs.
  • Financial disintermediation could lead banks to rely on more expensive and less stable sources of funding.

• Legal Implications of CBDC
  • Existing legal frameworks were typically enacted in a pre-digital age. Therefore, CBDC requires a legal framework that clarifies whether the central bank has the mandate to issue CBDC and what status it would have legally. 
  • The monetary law of the country also needs to be changed on the issues including the right of issuance of CBDC, legal tender status, and criminal law protection from counterfeits, etc.
  • In order to create and issue CBDC, we need to carefully consider the potential amendments of existing laws or the creation of laws before CBDC issuance.

• Privacy and data protection considerations: It will be essential to consider the way the privacy is respected, and the data is protected in a CBDC system.

Conclusion

• CBDC holds a lot of promises by way of ensuring transparency, and low cost of operation among other benefits and the potential to expand the existing payment systems to address the needs of a wider category of users.
• CBDC, across the world, is in conceptual development, or at pilot stages. 
• Therefore, in the absence of a precedence, extensive stakeholder consultation along with iterative technology design must take place to develop a solution that meets the requirement

News Source: The Hindu