ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Introducing CBDC in India

Time for Greater Clarity

This is an attempt to provide critical inputs towards developing a robust digital currency and associated infrastructure tailored to India’s needs and ensure an appropriate solution for near- and mid-term futures. It offers some potential steps that can be taken to advance the process forward.

 

The author gratefully acknowledges the feedback from a referee of EPW on the original draft of this article.
 

In the wake of the cryptocurrency and digital currencies revolution, many central banks are considering introducing sovereign digital currencies of their own as alternatives to cryptocurrencies as well as fiat currencies. These are commonly referred to as a central bank digital currency (CBDC) and are a digital form of currency notes issued by respective central banks. 

The International Monetary Fund (IMF 2022) defines cryptocurrency as “a private sector digital asset that depends primarily on cryptography and distributed ledger or similar technology.” Following this definition, cryptocurrencies are not backed or reliant on any sovereign authority. A cryptocurrency does not have a physical form and exists only in digital form such as a file or a token. A cryptocurrency uses a distributed computer network (also referred to as a blockchain or a distributed ledger technology [DLT]) for activities such as generation of currency, maintenance of network, recording transactions, and so on. A key aspect of the most common type of cryptocurrencies (such as Bitcoin and Etherium) is that they are not under the control and maintenance of any central authority such as a central bank. All activities such as issuance of the currency, entry of transactions, and tracking ownership change are verified and recorded by members of the network using some form of a consensus mechanism. This aspect is claimed as a major benefit of cryptocurrencies by its pro­ponents, which will disrupt the existing financial system and attendant benefits. However, sceptics see it as a means to bypass regulations and controls currently in place to ensure the integrity and stability of the monetary and financial ecosystem (RBI 2022). Interested readers may refer to Iyer and Kumar (2018) for a more detailed description of cryptocurrencies.

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Updated On : 29th Jan, 2024
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