Cyber security, frauds main concerns with digital currency: RBI

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Cyber security, frauds main concerns with digital currency: RBI

  • Recently, the RBI had announced that it has started work on the CBDC, in line with other major central banks of the world which are looking at a fiat digital currency.
  • As the RBI moves ahead for the launch of the central bank digital currency (CBDC), Governor Shaktikanta Das on Wednesday marked out cyber security and digital frauds as the main challenges in the new system.

Central Bank Digital Currency (CBDC)

  • CBDC is the same as currency issued by a central bank but takes a different form than paper.
  • It is the sovereign currency in an electronic form and it would appear as a liability (currency in circulation) on a central bank’s balance sheet.
  • The underlying technology, form, and use of a CBDC can be molded for specific requirements. CBDCs should be exchangeable at par with cash.
  • The idea of “Central Bank Digital Currencies” (CBDC) is not a recent development. Some attribute the origins of CBDCs to Nobel laureate James Tobin, an American economist, who in the 1980s suggested that Federal Reserve Banks in the United States could make available to the public a widely accessible ‘medium with the convenience of deposits and the safety of currency’.

What is the need for a CBDC?

  • While interest in CBDCs is universal now, very few countries have reached even the pilot stage of launching their CBDCs.
  • The adoption of CBDC has been justified for the following reasons:-
  • Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency (like Sweden).
  • Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan, or even the US).
  • Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.

CBDC vs Other Digital Payments systems

  • CBDCs are not just different from digital payments, they are in fact, not digital payments.
  • CBDCs are digital currencies that would not have any underlying physical aspect when there is any transaction between two parties via CBDC.
  • CBDCs can become the common currency for a nation but that depends on the choices of the nation’s Central Bank for the preferred CBDC type. For example, what kind of ledger (centralized or distributed) is used by the Central Bank for the launch of CBDC.

Associated concerns

  • Cybersecurity threats: Cyberspace is vulnerable to spyware and other threats. This is important as an attack on national digital currency can cripple the Indian economy or may even lead to bankruptcy.
  • Technology failures that are commonplace, especially in the government, may further harm the economy and become vulnerable to attacks from cybercriminals.
  • Inadequate digital literacy in India: as per the Digital Empowerment Foundation in a 2018 report, around 90% of India’s population is digitally illiterate. So, without creating enough literary awareness introduction of digital currency will create a host of new challenges to the Indian economy.
  • Privacy issues: the digital currency must collect certain basic information of an individual so that the person can prove that he’s the holder of that digital currency. This is a significant concern, especially in the absence of any individual privacy law in India.
  • It may also create various associated challenges in regulation, tracking investment and purchase, taxing individuals, etc.

Benefits of CBDC

  • Help in complete monetary policy transmission: as presently banks do not completely transmit changes in the monetary policy, resulting in the ineffectiveness of RBI’s policies.
  • Directly influenced creation and supply flow using a Digital Rupee will immediately reflect the effects of policy changes instead of relying on commercial banks to make those changes when they deem fit.
  • Creating a cashless society: as the government has taken many initiatives like Aadhar, Digital India Mission, demonetization, etc. aimed at creating a digital and cashless society. In this context, the digital rupee will prove a milestone in creating a cashless and digital society.
  • Reduce the cost of currency management: as it will enable real-time payments without any inter-bank settlement.
  • Reduction in the currency-to-GDP ratio due to the introduction of CBDC will substantially reduce the cost of printing, transporting, and storing paper currency.
  • Opportunity to private players: As the state-backed digital currency can provide investor/consumer protection, the private can confidently invest in the associated infrastructure without any doubts over its regulation. This will improve the services to people."