RBI for widening scope of ‘bank note’ to include digital currency

• The Reserve Bank of India (RBI) has proposed amendments to the Reserve Bank of India Act, 1934, which would enable it to launch a Central Bank Digital Currency (CBDC).
• The move comes amid the government’s plans to introduce a Bill on cryptocurrencies in the current Parliament session that seeks to prohibit “all private cryptocurrencies in India” with “certain exceptions”.

What is CBDC?

• The CBDC is a digital form of fiat currency which can be transacted using wallets backed by blockchain and is regulated by the central bank.

• Though the concept of CBDCs was directly inspired by bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.

• CBDCs enable the user to conduct both domestic and cross border transactions which do not require a third party or a bank.

• Benefits: “Introduction of CBDC has the potential to provide significant benefits,

• reduced dependency on cash,

• higher seigniorage due to lower transaction costs,

• reduced settlement risk

• robust,

• efficient,

• trusted,

• regulated and legal tender-based payments option.

• Issues:

• Some key issues under RBI's examination include, the scope of CBDCs, the underlying technology, the validation mechanism and distribution architecture.

• Also, legal changes would be necessary as the current provisions have been made keeping in mind currency in a physical form under the Reserve Bank of India Act.

• Consequential amendments would also be required in the Coinage Act, Foreign Exchange Management Act (FEMA) and Information Technology Act.

• Sudden flight of money from a bank under stress is another point of concern.

Recent Developments:

• El Salvador, a small coastal country in Central America, has become the first in the world to adopt Bitcoin, as legal tender.
• Britain is also exploring the possibility of creating a Central Bank Digital Currency (Britcoin).
• In 2020, China started testing its official digital currency which is unofficially called “Digital Currency Electronic Payment, DC/EP”.
• In April 2018, RBI banned banks and other regulated entities from supporting crypto transactions after digital currencies were used for frauds. In March 2020, the Supreme Court struck down the ban as unconstitutional."