We recently reported that the Federal Reserve plans to launch a 12-week pilot program in partnership with several large commercial banks to test the feasibility of a central bank digital currency (CBDC). The US isnāt alone in experimenting with digital currency. India is working on developing a digital rupee and recently announced the second phase of testing.
After successfully running a pilot program to test its digital currency at the wholesale level, the Reserve Bank of India (RBI) has announced it will test the digital rupee in a retail setting.
According to the RBI, the central bank digital currency āis a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.ā
Digital currencies are similar to bitcoin and other cryptocurrencies. They exist as virtual banknotes or coins held in a digital wallet on your computer or smartphone. The difference between a government digital currency and bitcoin is the value of the digital currency is backed and controlled by the state, just like traditional fiat currency.
As the RBI put it, āUnlike cryptocurrencies, a CBDC isnāt a commodity or claims on commodities or digital assets. Cryptocurrencies have no issuer. They are not money (certainly not currency) as the word has come to be understood historically.ā
According toĀ a report in theĀ Economic Times of India, the National Payments Corporation of India will host the platform for the digital rupee payment system during the testing phase. The Reserve Bank of India wants each commercial bank in the pilot to test retail use of the digital rupee with 10,000 to 50,000 users.
State Bank of India, Bank of Baroda, Union Bank of India, ICICI Bank, HDFC Bank, Kotak Mahindra Bank, Yes Bank and IDFC First Bank will participate in the pilot program. If the pilot is successful, the RBI will roll out the program to the entire Indian banking system.
āThe e-rupee will be stored in a wallet, the denominations will be available as per the customerās request, just like you request cash from an ATM. Banks are launching this only in select cities,ā a person involved in the program told theĀ Times.
In a concept note, the RBI touted the benefits of digital currency.
It is believed that retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of the central bank. Wholesale CBDC has the potential to transform settlement systems for financial transactions and make them more efficient and secure. Going by the potential offered by each of them, there may be merit in introducing both CBDC-W and CBDC-R.ā
Government-issued digital currencies are sold on the promise of providing a safe, convenient, and more secure alternative to physical cash. Weāre also told it will help stop dangerous criminals who like the intractability of cash. But there is a darker side ā the promise of control.
At the root of the move toward government digital currency is āthe war on cash.ā The elimination of cash creates the potential for the government to track and even control consumer spending, and it would make it even easier for central banks to engage in manipulative monetary policies such asĀ negative interest rates.
Imagine if there was no cash. It would be impossible to hide even the smallest transaction from government eyes. Something as simple as your morning trip to Starbucks wouldnāt be a secret from government officials. AsĀ BloombergĀ put itĀ in an article published when China launched its digital yuan pilot program, digital currency āoffers Chinaās authorities a degree of control never possible with physical money.ā
The government could even āturn offā an individualās ability to make purchases.Ā BloombergĀ described just how much control a digital currency could give Chinese officials.
The PBOC has also indicated that it could put limits on the sizes of some transactions, or even require an appointment to make large ones. Some observers wonder whether payments could be linked to the emerging social-credit system, wherein citizens with exemplary behavior are āwhitelistedā for privileges, while those with criminal and other infractions find themselves left out. āChinaās goal is not to make payments more convenient but to replace cash, so it can keep closer tabs on people than it already does,ā argues Aaron Brown, a crypto investor who writes for Bloomberg Opinion.ā
China launched its digital yuan pilot program last year. The Chinese government-backed digital currencyĀ got a boostĀ when the countryās biggest online retailer announced the first virtual platform to accept the Chinese digital currency.
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