U.S. Central Bank Digital Currency (CBDC)

Article Title: U.S. Central Bank Digital Currency (CBDC)

25-01-2025

Economy Current Affairs Analysis

Context:

The recent Order in the U.S. prohibits the issuance, circulation, and use of the U.S. Central Bank Digital Currency (CBDC), also referred to as the "Digital Dollar," within the jurisdiction of the U.S. This decision has significant implications for the potential adoption of CBDCs in the U.S. financial system.

About CBDC:

A Central Bank Digital Currency (CBDC) is the electronic version of a country’s sovereign currency issued directly by the nation's central bank.

Unlike cryptocurrencies, which are decentralized and typically operate outside government control, CBDCs are centralized and governed by the issuing country's central bank.

Types of CBDCs:

  1. Wholesale CBDCs: These are used by financial institutions and market participants for large-scale transactions, such as interbank transfers, securities settlements, and other high-value financial operations.
  2. Retail CBDCs: These are designed for use by the public, including retail consumers and businesses, for everyday transactions. Retail CBDCs are further divided into:
  • Token-based: These are accessed using private and public keys and can allow for anonymous transactions, similar to how cryptocurrencies work.
  • Account-based: These require digital identification for users to access and use their accounts, which means they are more traceable and linked to an individual’s identity.

Features of CBDC:

  • Medium of Payment: It must be accepted as a legal tender and store of value by citizens, businesses, and government agencies alike.
  • Convenience: CBDCs are expected to lower issuance costs and transaction fees, potentially increasing the efficiency of the monetary system.
  • Centralized Liability: Unlike commercial bank money, which is a liability of commercial banks, CBDC is a liability of the central bank (e.g., Reserve Bank of India (RBI) or Federal Reserve).

Concerns with CBDCs:

  • Financial System Stability: The centralization of currency could affect the stability of the financial system, especially if too much money is held in CBDCs, leading to changes in bank deposits and the broader money supply.
  • Privacy Issues: Some concerns around CBDCs revolve around the potential compromise of individual privacy, as digital currencies are often traceable, leading to concerns about surveillance and data privacy.
  • Cybersecurity: As a purely digital currency, CBDCs are vulnerable to cyberattacks and hacking, which could undermine trust in the system.

CBDC in India – The e-Rupee (e₹):

  • Launch: India's Central Bank Digital Currency (CBDC), called e-Rupee (e₹), was launched in 2022 by the Reserve Bank of India (RBI). The e₹ is essentially a digital version of the Indian Rupee and is exchangeable one-to-one with the fiat currency (physical rupee).
  • Functionality: The e₹ can be held and transacted using e₹ wallets, which are offered by both banks and non-banking financial institutions (NBFCs). These wallets enable person-to-person (P2P) payments or person-to-merchant (P2M) transactions, facilitating digital payments across India.
  • Benefits: The e₹ aims to enhance the efficiency of digital payments, reduce the cost of printing and managing physical currency, and modernize the financial infrastructure, while also offering greater transparency in transactions.

The introduction of CBDCs like India’s e₹ is a step towards digitizing monetary systems, with countries around the world exploring or implementing similar initiatives. However, the concerns around privacy and financial stability will continue to be critical points of debate as these digital currencies evolve.

The U.S. stance on CBDCs could have a broader impact on global discussions regarding digital currencies, their adoption, and the potential risks associated with them, especially in terms of financial sovereignty and privacy rights.