Context:
The Central Bank Digital Currency (CBDC) could be used for collections of micro loans as an innovative tool to streamline the mechanism for collections, a top Reserve Bank of India (RBI) official said, citing insufficient innovation on collection-side of lending.
Origin
The first central bank digital currency (CBDC) was the Avant smart card, which was launched in 1993 by the Bank of Finland. However, it was discontinued in the early 2000s.
What is Central Bank Digital Currency (CBDC)?
CBDC is the digital version of a country’s fiat currency. It is issued by the central bank and is a liability of the central bank.
- How does it work?
- CBDCs are digital coins or accounts that are backed by the government.
- They can be used to make digital transactions and transfers.
- CBDCs can be developed in centralized or decentralized ways.
- Why is it being considered?
- CBDCs would help identify and prevent crime much easier.
- They would help make it easier to collect taxes, hence reducing tax evasion.
- CBDCs can bring financial access to people who are unbanked currently.
Examples of CBDCs
- Digital Rupee: India’s CBDC.
- JAM-DEX: Jamaica’s CBDC, which is the first formally ratified legal tender as a CBDC.
- Sand Dollar: The Bahamas’ CBDC, which is blockchain based.
- DCash: CBDC of the Eastern Caribbean Central Bank, based on blockchain.
Pros and Cons
- CBDCs would make it impossible to have bank runs or bank failures.
- CBDCs would enable easier detection of criminal activities and easier curb of the same.
- CBDCs would make collection of taxes easy and reduce tax evasion.
- However, the risks associated with CBDCs include privacy, sovereignty, and even financial stability.
Know more about Central Bank Digital Currency (CBDC) >>
Source: Business Stand
