Central Bank Digital Currency

1. Ensures financial security, privacy, transferability, and accessibility  
2. Reduced dependency on the dollar  

1. Enhances the efficiency of the interbank market  
2. Reduces transaction cost, including cross-border transaction cost  
3. Transactions made within the authorised network are accessible by the government  
4. CBDC is always under government radar and hence is safe  
5. Durable form of money than the physical money  

1. A great alternative to money orders, check-cashing, and payday loans 

Types of CBDC 

The following are the two main types of Central Bank Digital Currency: 

1. Retail CBDC (e₹-R): Accessible for all such as businesses and consumers. Intermediary risk is eliminated by Retail CBDC as these currencies are backed by the government. While private issuers may become bankrupt, and customers may end up losing their assets. 

The following are the types of Retail CBDCs: 

1. Account-based retail CBDCs: Accessing this type of savings account requires digital identification. 
2. Token-based retail CBDCs: Transactions can be executed anonymously through the method of validation using public or private keys. 

1. Wholesale CBDC (e₹-W): Selected financial institutions are restricted for accessing this form of CBDC. For depositing the funds or availing the interbank transfer services, the Central Bank grants an account to specific financial institutions. The lending rates and the interest rates are set by the Central Bank by making use of the reserve balance or the reserve requirements. 

Issues Resolved by CBDC 

The following are the issues that have been addressed by the Central Bank Digital Currency:  

1. Eliminates the need for expensive infrastructure by connecting consumers and Central Bank  
2. Provides financial access to the unbanked population of the country   
3. Reduces cost of implementing financial structure  
4. Reduces the third-party risk such as banking failures  
5. The cost of high-border transactions has been reduced by simplifying complex distribution systems  

1. Increases jurisdictional cooperation between governments 

Issues Created by CBDC that Need to be Solved  

Here are the issues that need to be addressed or resolved by the CBDC:  

1. Privacy: Intrusion of the authorities is required to combat various financial crimes, such as financing terrorism and money laundering to preserve the privacy of the users.  
2. Cybersecurity: Theft of assets and penetration of the financial system must be addressed to protect sensitive information from hackers.  

1. Stability of financial system: The impact of switching to CBDC is unpredictable, which may affect financial stability. Such an issue must be addressed to avoid the risk of a monetary crisis, in case there is not enough liquidity available to the Central Bank to allow withdrawals.  
2. Influences monetary policies: Monetary policies introduced by the Central Bank impact lending, spending, interest rates, and inflation rates. The Central Bank must introduce tools that will influence the economy positively and will protect the employment rates from the negative impact of monetary policies.  
3. Changes in financial structures: Any change in the financial structure will impact the banking reserves, interest rates, investments, financial services sectors, household expenses, and the overall economy. Changes in the financial structure must be addressed to eliminate its effects on the overall economy of the country. 

Difference Between CBDC and Cryptocurrency 

The following is the list of main differences between the Central Bank Digital Currency and Cryptocurrency: 

Countries that have Launched CBDCs 

The following are the nine countries that have launched CBDCs, as of March 2022: 

1. Nigeria 
2. Dominica 
3. St. Vincent and the Grenadines 

1. Antigua and Barbuda 
2. The Bahamas 
3. Monserrat 
4. Saint Lucia 
5. St. Kitts and Nevis 

1. Grenada 

India is among the 80 nations that have initiated digital currency project, followed by Jamaica, Bank of Canada, Bank of England, Sweden's Riksbank, and the United States.