HPAS/ N.T. Allied Mains 2022-23 Answer Writing Challenge: Model Answer

Question: What is Central Bank Digital Currency (CBDC)?  List out the features &  advantages of CBDC? (8 marks, 120 words)

Answer: 

INTRO

• CBDC is a legal tender issued by the RBI in digital form.
• It is the same as the fiat currency, and is exchangeable one-to-one with the fiat currency.
• Only its form is different — it is not paper (or polymer) like physical cash.

The features of CBDC include:

• CBDC is sovereign currency issued by Central Banks in alignment with their monetary policy
• It appears as a liability on the central bank’s balance sheet
• Must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.
• Freely convertible against commercial bank money and cash
• Fungible legal tender for which holders need not have a bank account
• Expected to lower the cost of issuance of money and transactions

CBDCs have some clear advantages over other digital payments systems-

• It is a sovereign currency, ensures settlement finality and thus reduces settlement risk in the financial system
• CBDCs could also potentially enable a more real-time, cost-effective seamless integration of cross border payment systems
• India has made impressive progress in innovation in digital payments
• The payment systems are available 24X7, 365 days a year to both retail and wholesale customers, they are largely real-time
• the cost of transaction is perhaps the lowest in the world