A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.
Central Bank Digital Currency (CBDC):
CBDC is not a well-defined term. However, it is envisioned by most to be a new form of central bank money. That is, a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value.
CBDC is a digital form of central bank money that is different from balances in traditional reserve or settlement accounts
Pros of Central Bank Digital Currency:
- With the spread of formal banking services, primarily on account of advances in communications technology, soon many Indians will be able to transact almost all the time without using cash, if they so choose.
- CBDC could reinforce the resilience of a country’s retail payment systems. CBDC could reduce the concentration of liquidity and credit risk in payment systems.
- Banknotes allow anonymous transactions so a reduced use or elimination of banknotes would help fight illegal activities.
Cons of Central Bank Digital Currency:
- The Project needs a huge investments and as in case of Ecuador, if the Bank Accounts opened and Transactions are below the limit it would further increase burden on Government’s resources which is still helping Banks fixing NPA problems.
- The Bank could lose their Position in Payment Business if Individuals get Direct Access to Central Bank’s Currency.
- Bank for International Settlements (BIS) suggested that state-backed crypto might destabilize commercial banks customer deposits, negatively impacting the efficiency of financial intermediation.
- Different implications for payment systems, monetary policy transmission as well as the structure and stability of the financial system.
- Cyber-security is currently one of the most important operational challenges for central bank systems and the financial industry more generally.
- Any steps towards the possible launch of a CBDC should be subject to careful and thorough consideration. Further research on the possible effects on interest rates, the structure of intermediation, financial stability and financial supervision is warranted.
- The effects on movements in exchange rates and other asset prices remain largely unknown and also deserve further exploration.
- More generally, central banks and other authorities should continue their broad monitoring of digital innovations, keep reviewing how their own operations could be affected and continue to engage with each other closely.
- Besides consequences for financial stability, effects on the efficiency of financial intermediation need to be carefully considered
- Robust mitigation methods of cyber-risk would therefore be a prerequisite for CBDC issuance.