Author(s): Gehna Vats
Paper Details: Volume 3, Issue 3
Citation: IJLSSS 3(3) 29
Page No: 398 – 402
The concept of digital currency has an extensive history. The fundamental banking framework, however, has remained mostly unchanged. The system’s premise is that commercial banks may generate digital money, which the central bank can then convert into physical cash. This illustrates the rationale for the system’s design. Certain transactions that formerly required cash have become entirely redundant owing to the widespread use of banking apps and the digitization of payments via credit and debit cards. (Zemp, 2023).
The launch of Bitcoin in 2009 revolutionized digital payments, followed by rapid developments in blockchain technology, decentralized finance and smart contracts. The regulatory bodies overseeing cryptocurrencies vary significantly from those governing traditional monetary systems. Cryptocurrencies are governed by a decentralized framework, devoid of central authority oversight. Instead, they rely on a decentralized network of nodes to authenticate transactions and maintain system security. This decentralization is often seen as a significant advantage due to its reduction of manipulation and censorship risks. (ET. Spotlight, 2024).
From a governance perspective, CBDCs, being a direct liability of the central bank, offer enhanced security and accountability compared to cryptocurrencies, which operate in a decentralized manner. By directly monitoring and controlling the currency, central banks can implement monetary policy changes with immediate effect. Governance of digital currencies, however, should not just focus on oversight but also on privacy and security. With the monitoring of every transaction, concerns about privacy become more pronounced. As acknowledged in the Puttaswamy ruling in Article 21 of the Indian Constitution, this degree of supervision may lead to disproportionate governmental monitoring, which would be against the right to privacy. To avoid abuse, a legitimate approach has to combine protection of privacy with AML and KYC observance.
The implementation of CBDCs encompasses several dimensions, including technological, monetary, social, political, legal, environmental, and ethical aspects. It is essential to possess appropriate technological infrastructure and social support to adhere to cultural norms and political objectives while ensuring ecological sustainability and ethical purity. The methods by which CBDC adoption could overcome these challenges remain unclear, however. A kind of digital currency is central bank digital currency, or CBDC. One of the key benefits of digital currencies is their ability to simplify financial processes. Transactions can be completed in real time, without the hurdles of traditional banking systems. It would not replace currency but rather augment it. The central bank issues digital currency units, which are recorded in a digital ledger. The distribution of CBDC resembles that of cash at commercial banks and other financial institutions. Users may execute transactions using digital wallets and other digital platforms, with each transaction documented in the central bank’s secure digital ledger. The person must choose whether to convert their CBDC into fiat currency or deposit it in a bank account. CBDCs are seen as a safer option compared to cryptocurrencies since they are direct liabilities of the central bank. Similar to checking accounts at commercial banks, they operate in the same manner as the government-operated bank. Furthermore, digital currencies reduce the need for physical cash, thus minimizing costs associated with printing, distributing, and securing cash. The digital nature of CBDC transactions renders physical cash obsolete. This facilitates financial transactions, reducing reliance on monetary resources. (Sanskriti and Saleem, 2024).
This can be particularly beneficial in cross-border transactions, where time zone differences and currency conversion complexities often cause delays. Although CBDCs make transactions across borders easier, a country’s financial independence may be threatened by an excessive dependence on foreign electronic currencies. To avoid such dangers and control international CBDC flows, global partnership via IMF and BIS structures would be crucial.
CBDCs can be a game-changer, especially in countries like India, where millions of people still lack access to formal banking systems. The ease of conducting transactions via mobile phones, without the need for a bank account, empowers citizens to participate in the digital economy. Regardless of its promise, this system might disregard disadvantaged groups due to infrastructural deficiencies and computer proficiency issues. To prevent CBDCs from unintentionally introducing novel forms of isolation, authorities ought to pass legislation requiring offline consumption or sponsored phone facilities.
Authorities may more readily identify and thwart unlawful activities using CBDCs, since all transactions are subject to monitoring. Furthermore, it eliminates clandestine markets that primarily transact in physical cash. Individuals without access to traditional banking services may nonetheless engage in CBDC transactions since a bank account is not required. The extensive accessibility of mobile internet, coupled with restricted access to traditional financial services, makes this particularly beneficial in underdeveloped countries. The production and dissemination of physical cash, along with other expenses related to currency management, may be significantly reduced with digital currencies. CBDCs obviate the need for currency conversion and mitigate time zone discrepancies, facilitating cost-effective and straightforward international transactions. (Bank of Canada and others, 2021).
The Digital Rupee enables the RBI to have direct control over monetary policy, resulting in immediate implementation of policy adjustments. The digital rupee improves banking technology/innovation, gives policymakers new instruments and mitigates fraud/scams via transaction/credit flow surveillance. The implementation of the digital rupee would provide more access to financial products and services, while simultaneously reducing tax evasion. The implementation of the digital rupee will significantly transform the financial technology sector, creating new opportunities for expansion while simplifying cash flow management, printing, and handling processes. (Andolfatto, 2020).
The implementation of the digital rupee will provide significant advantages for the economy, enhancing efficiency in digital transactions both nationally and globally. The digital rupee will aid in combating corruption and illegal finance while making counterfeiting difficult. The introduction of the Digital Rupee would expedite financial inclusion, reduce transaction cost, establish an alternative payment system, and provide central banks with an additional instrument for monetary policy. The deposit guarantee scheme safeguards clients’ cash in the case of a commercial bank insolvency, while retaining funds with the central bank mitigates this risk. CBDCs will render payment gateways and card networks obsolete. Despite the existence of 582 million bank accounts in India, there are 1.2 billion mobile phone connections. The CBDC may facilitate the reconciliation of the divide. (Bank for International Settlements, 2022).
The introduction of the Digital Rupee presents India with an opportunity to modernize its financial system, enhance individual autonomy, and integrate into the expanding digital economy. Policymakers must consider the potential impacts on consumer demand, financial infrastructure, liquidity, and the overall economy. The Digital Rupee has the potential to promote financial inclusion and efficiency by reducing reliance on traditional banking and facilitating seamless transactions. (Kramer, 2019).
In conclusion, central bank-issued digital currencies pose no threat to traditional banks; instead, they represent the future trajectory of finance. These currencies may enhance and fortify the financial system rather than replace it. Central Bank Digital Currencies (CBDCs) provide several benefits, such as facilitating immediate transactions, reducing transaction costs for international remittances, enhancing system transparency, and integrating the unbanked into the financial system. While CBDCs provide a challenge to certain aspects of traditional banking, such the use of real cash and card networks, they also offer banks an opportunity to enhance, evolve, and integrate digital currencies into their offerings. Banks may sustain their relevance and broaden their clientele in the burgeoning digital economy by embracing this technological advancement. Consequently, digital currencies are essential in establishing a future financial system that is both more accessible and efficient. The issuing of CBDCs, despite this, makes it more difficult to distinguish within the functions of central and commercial banks, which might result in arbitrary regulation. To preserve liquidity in the economy, updated laws must be implemented to guarantee that corporate banks continue offer crucial financial amenities like refinancing.Consequently, digital currencies are essential in establishing a future financial system that is both more accessible and efficient.
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