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Economy
Mahesh

07/09/23 06:48 AM IST

Adoption of CBDCs can make cross-border payments more efficient

In News
  • Reserve Bank of India (RBI) Governor Shaktikanta Das recently said the adoption of Central Bank Digital Currency (CBDC), or digital currency, can help in making cross border payments more efficient.
CBDCs
  • CBDCs are a digital form of a paper currency and unlike cryptocurrencies that operate in a regulatory vacuum, these are legal tenders issued and backed by a central bank.
  • It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
  • A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver.
  • The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
  • 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.
  • The main objective is to mitigate the risks and trim costs in handling physical currency, costs of phasing out soiled notes, transportation, insurance and logistics.
  • It will also wean people away from cryptocurrencies as a means for money transfer.
Significance
  • CBDCs possess unique attributes that can revolutionize cross-border transactions.
  • Instant settlement feature of CBDCs as a significant advantage, making cross-border payments cheaper, faster, and more secure.
  • CBDC can gradually bring a cultural shift towards virtual currency by reducing currency handling costs.
  • The increased use of CBDC could be explored for many other financial activities to push the informal economy into the formal zone to ensure better tax and regulatory compliance.
  • The first issue to tackle is the heightened risk to the privacy of users—given that the central bank could potentially end up handling an enormous amount of data regarding user transactions.
  • If sufficiently large and broad-based, the shift to CBDC can impinge upon the bank’s ability to plough back funds into credit intermediation.
Source- PIB

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