03/12/2020 - Indian Economy | Mainstorming

IAS Parliament 4 years

KEY POINTS

· With the European Central Bank expressing its intention to evaluate a Central Bank issued Digital Currency (CBDC) for the Euro Zone, it is apparent that regulators can no longer shrug aside digital currencies as a passing fad, or look upon them with suspicion.

· China may, however, be the first in this race; work on a CBDC has already begun and the Digital Currency Electronic Payment (DCEP) is currently being pilot tested in many Chinese cities.

Challenges

· The need for a digital currency arises from two main factors: marginalising the use of ‘cryptocurrency’ by anonymous non-State actors, often for nefarious ends; and moving to cashless transactions to curb tax evasion.

· Indian regulators are yet to start work on developing a government-backed digital currency, though there were reports of the RBI exploring its feasibility around three years back.

· Governments and monetary authorities are apprehensive for good reasons. The past decade has been a roller-coaster for cryptocurrencies, led by Bitcoin, with frenzied rallies, large declines and numerous scams involving money laundering, terror financing and drug trafficking.

· The RBI’s stance that it is against any privately issued digital currency is unexceptionable, as these currencies are not backed by any asset. Yet, a legal digital currency is not without advantages. The RBI should follow China’s and the EU’s example to start work on a digital currency for India.

Advantages of official digital currencies

· It can play an important role in weaning users away from using cash, which will help control tax evasion.

· CBDCs will be pegged to the fiat currency and hence will not witness the volatility being seen in crypto currencies.

· Official digital currencies will be legal tender with sovereign backing, thus protecting consumers.

· It will help distract investors from the current bunch of crypto assets that are highly risky.