Page 45 - Banking Finance December 2021

ARTICLE

European Union, and China, have been working towards iii. Central banks seek to meet the public's need for digital
issuing their own digital currency ever since the spectacular currencies. As the virtual currency is the entering in the
rise in the value of privately issued crypto-currency. Indian market so to overcome the dire consequences CBDC is
central bank's digital rupee could pave the way ahead for the only option.
country's crypto ecosystem.
iv. It is conceivable for an Indian importer to pay its
American exporter on a real time basis in digital dollars,
Central Bank Digital Currency or CBDC: without the need of a middleman.
On July 22, Reserve Bank of India (RBI) Deputy Governor v. As the circulation of currency is more in our country.
said the regulatory body is considering introducing a central The arrival of CBDC will lessen the circulation. In this
bank digital currency (CBDC) in a phased manner. It is way expenditure in form of printing, transportation and
sovereign currency in an electronic form, and it will appear distribution will be reduced.
as liability (currency in circulation) on a central bank's
balance sheet. A CBDC is the legal tender issued by a central Role of CBDC in Banking System:
bank in a digital form. It is the same as a fiat currency and
is exchangeable one-to-one with the fiat currency except i. CBDC will play the important role in settling down the
its form. The underlying technology, form, and use of a CBDC settlement and liquidity risk.
can be moulded for specific requirements. CBDCs should be ii. At the same time reduced disintermediation of banks
exchangeable at par with cash. carries its own risks. If banks begin to lose deposits
over time, their ability for credit creation gets
Status on Central Bank Digital constrained.

Currencies Globally: iii. Availability of CBDC makes it easy for depositors to
withdraw balances if there is stress on any bank. Flight
On July 14, the European Central Bank launched its digital
of deposits can be much faster compared to cash
euro project, approving an "investigation phase" that could withdrawal.
ultimately lead to a virtual currency being implemented later
in this decade. iv. On the other hand, just the availability of CBDCs might
reduce panic 'runs' since depositors have knowledge
Most major central banks have followed China where the that they can withdraw quickly.
digital Yuan has already been in circulation in several cities. v. One consequence could be that banks would be
The US Federal Reserve and the Bank of England are also motivated to hold a larger level of liquidity which could
looking into the possibilities of digital currency for their result in lower returns for commercial banks.
economies.
vi. CBDCs are currency and therefore do not pay interest,
According to a survey by the Bank for International their impact on bank deposits may actually be rather
Settlements, Around 86% of global central banks were limited. Depositors that require CBDCs for transactional
actively researching the potential for central bank digital
currency, while 60% were experimenting with the
technology and 14% were launching pilot projects.
Need for a CBDC:

The adoption of CBDC has been justified for the following
reasons:
i. Central banks, faced with dwindling usage of paper
currency, seek to popularize a more acceptable
electronic form of currency like Sweden.
ii. Jurisdictions with significant physical cash usage seeking
to make issuance more efficient like Denmark,
Germany, or Japan or even the US.

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