G7 guidelines for central bank digital currencies: – INSIGHTSIAS

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GS Paper 3

Topics Covered: Awareness in technology.

 

Context:

G7 finance leaders have laid out guidelines for central bank digital currencies.

 

The guidelines include:

  1. Any digital currency issued by a central bank must “support and do no harm” to the bank’s ability to fulfil its mandate on monetary and financial stability, and must also meet rigorous standards.
  2. Currencies must be issued in a way that do not infringe upon the central banks’ mandates, and meet rigorous standards of privacy, transparency and accountability for protection of user data.
  3. Any central bank digital currency (CBDC) should be grounded in long-standing public commitments to transparency, rule of law and sound economic governance.

 

What is the CBDC or National Digital currency?

A Central Bank Digital Currency (CBDC), or national digital currency, is simply the digital form of a country’s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the government.

 

How can CBDC be used in the Indian context?

  1. ‘Fit-for-purpose’ money used for social benefits and other targeted payments in a country. For such cases, the central bank can pay intended beneficiaries pre-programmed CBDC, which could be accepted only for a specific purpose.
  2. CBDCs could be used for faster cross-border remittance payments. International collaboration among the major economies of the world, including India, could help create the necessary infrastructure and arrangements for CBDC transfer and conversion.
  3. Payment instruments could be made available for payment transactions to be made via CBDC. Furthermore, universal access attributes of a CBDC could also include an offline payment functionality.
  4. Instant lending to micro, small, and medium enterprises (MSMEs) in India can be possible with the help of CBDC.

 

Need for CBDC:

  1. An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
  2. India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC — to the extent large cash usage can be replaced by CBDC, the cost of printing, transporting and storing paper currency can be substantially reduced.
  3. The need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another.

 

Challenges in rolling out National Digital Currency:

  1. Potential cybersecurity threat.
  2. Lack of digital literacy of the population.
  3. Introduction of digital currency also creates various associated challenges in regulation, tracking investment and purchase, taxing individuals, etc.
  4. Threat to Privacy: 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.

 

SC Garg Committee recommendations (2019):

  1. Ban anybody who mines, hold, transact or deal with cryptocurrencies in any form.
  2. It recommends a jail term of one to 10 years for exchange or trading in digital currency.
  3. It proposed a monetary penalty of up to three times the loss caused to the exchequer or gains made by the cryptocurrency user whichever is higher.
  4. However, the panel said that the government should keep an open mind on the potential issuance of cryptocurrencies by the Reserve Bank of India.

 

Insta Curious:

Do you know what the IOTA Tangle is? Read Here

 

InstaLinks:

Prelims Link:

  1. What is a blockchain?
  2. What are Cryptocurrencies?
  3. Which countries have issued Cryptocurrencies?
  4. What is a Bitcoin?

Mains Link:

Discuss the pros and cons of CBDC.

Sources: Economic times.

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