The RBI is likely to start pilot projects to access the viability of using digital currency to make wholesale and retail payments to help calibrate its strategy for introducing a full-scale Central Bank Digital Currency(CBDC).
A high level ministerial committee setup by the finance ministry had recommended the introduction of a CBDC with changes in the legal framework including the RBI act.
How does a CBDC works?
Instead of printing paper currency or minting coins the central bank issues electronic tokens. This token value is backed by the full faith and credit of the government .At present ,central banks of various nations are currently examining the positive implications that a digital currency contributes to financial inclusion, economic growth, technology ,innovation and increased transaction efficiencies.
Advantages:
An official digital currency would reduce the cost of currency management while enabling real-time payments without any intermediate settlements.
India's fairly high currency - to- GDP ratio holds out another benefit of CBDC, the cost of printing transporting and storing paper currency can be substantially reduced.
The need for inter-bank settlements would disappear as it would be a central liability handed over from one person to another.
Criminal activities can be easily spotted and ended such as money laundering,terror funding etc.
Foreign trade transactions could be speeded up between countries adopting a CBDC.
Disadvantages:
potential cybersecurity threat.
lack of digital security among the population.
Introduction also creates problems in regulation,tracking etc
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