How is it different from the money in your Bank account, considering it’s already digital?
CBDC is a digital ledger of legal tender issued by India’s Central Bank, RBI. You could think of this as an alternative to Cash. Except that the RBI knows who is holding how much at any moment of time.
Mind that, only RBI knows about this, not the government, nor the banks(technically). Though Govt could ideally find out, probably if needed.
When you use UPI to transfer money from your wallet to a business or your friend, what happens is that the money in your ‘bank’ is transferred to the the money in third party’s ‘bank’.
Let’s get back a bit and think about how a cash transfer would work? If you have cash, you just hand it over. That’s it, end of story. The new digital currency will help do this, that is WiTHouT an intermediary like a Bank.
So, RBI says the transaction overhead by the banks are now reduced too. And, in case your bank charges for a transaction, that will be avoided too in the future with CBDC.
Why is this useful?
Banks, (as per Yanis Varoufakis’ book “Brief history of Capitalism) — Had an option of creating artificial money.
Let’s say a business needs a loan; They approach bank, and after paper work, the money (That is, digits of numbers in the Bank’s database) suddenly is equal to the actual amount + the loan amount. So, banks had the option of creating money out of thin air.
Now, the banks need to report books to RBI not in real time, so by the time they have to report, they would have got the money from the businesses as interest, along with the actual loan handed over. Cool right? ( I’m not saying every bank does this, however, they do have the option).
Also, what if a bank goes bust. The time taken for money to reach the end customers takes time. That will now be avoided too!
So, with the new way; the money circulation in the economy is tied to a digital ledger, that is maintained by RBI.
Will it kill banks?
No. Because the CBDC that you hold in your wallet CAN never provide interest as RBI cannot directly issue credit to end customers. You will have to use banks to get the interest. So, there will be banks, except that this will disrupt a few banking procedures, and other innovation needs to happen on banks end to stay afloat.
Banks are not totally “for” this; But they do understand it’s about time and business needs an overhaul.
How does it compare to bit coins?
CBDC is backed by sovereign guarantee. Think of this as a replacement of our age-old notes, and coins. While bitcoins on the other hand, could end up becoming the biggest scam in the century as it’s backed by nothing! (And, I really hope not).
Other Caveats of CBDC
Like any other tech, it’s prone to be hacked. That is where digital ledger technology borrowed by the underlying bitcoin technology would come to rescue. However, you never know until it’s LIVE in the market.