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Central Bank Digital Currency

Central Bank Digital Currency

Bitcoin, by far the most popular cryptocurrency, has been making headlines for quite some time now. It was developed by Satoshi  Nakamoto in 2008, contrary to popular belief bitcoin is not the first cryptocurrency, that award goes to eCash. Bitcoin uses distributed ledger technology called the blockchain. With the advent of private decentralized cryptocurrencies like Bitcoin, Ethereum, etc., central banks of different countries play catch-up with the digital currency. The central banks have finally woken up and currently, 50 + countries are in various stages of digital currency development. China’s digital yuan (DCEP) is leading the pack and it is expected that country-wide implementation will be done by the end of 2021. The government of India will introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which may ban trading in private cryptocurrencies such as Bitcoin and will provide legal powers to RBI to develop Central Bank Digital Currency.

Digital Yuan or DCEP ( Digital Currency Electronic Payment)  is backed by China’s national currency Yuan. The key difference between bitcoin and DCEP is that DCEP is a centralized legal tender backed by national currency whereas bitcoin is decentralized and not a legal tender. The aim of DCEP is financial inclusion and growth of digital payments. Another salient point of DCEP is its traceability, for centuries money has remained fungible but, that is set to change with Digital Yuan. Any person or entity doing a  transaction with DCEP will be stamped, therefore creating a record with the details of the transaction, which can be queried at any point in time. Many critics are arguing that it will be an encroachment on the privacy of the user, others are speculating that it is a new tool for the Chinese government to monitor its residents.

Other than China, Ecuador launched the e- currency in 2015, Tunisia launched blockchain-based “ E- Dinar” in 2016 while several other countries like Sweden, Turkey, Indonesia, Brazil, etc. are in various phases of development and testing. A consortium of central banks, including Canada, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Sveriges Riksbank – Central bank of Sweden, have partnered with the European Central Bank and Bank of International Settlements ( BIS). This partnership will assess the use cases for CBDC for economic, functional, and technical design including cross-border payments and interoperability.

CBDC, if implemented correctly will be the innovation of the decade a game-changer providing frictionless payments for inter-country and intra- country transactions, creating the most seamless and quickest payment instrument that mankind has ever witnessed. With the new regulation on cryptocurrency and digital currency, India has taken baby steps for developing its Central Bank Digital Currency.

50 + Countries are in various stages of CBDC implementation, an area where India has lagged behind  Blockchain is an area that is expected to see a lot of growth in the coming years. With several countries including India launching their own Digital Currencies, professionals in the BFSI space need to have in-depth knowledge of how they can leverage blockchain technology to improve processes within their organization.

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