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What is central bank digital currency (CBDC)? How does it work? CBDC is slowly gaining momentum and acceptance across the world. Discuss its potential benefits and challenges in India.

Topic: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

5. What is central bank digital currency (CBDC)? How does it work? CBDC is slowly gaining momentum and acceptance across the world. Discuss its potential benefits and challenges in India. (250 words)

Difficulty level: Moderate

Reference: Live Mint

Why the question:

RBI Deputy Governor T. Rabi spoke briefly about the central bank’s plan to introduce a digital rupee, or its own version of CBDC, in the near future.

Key Demand of the question:

To explain about CBDC, the technology behind it, its potential benefits and challenges.

Directive word: 

Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer:

Introduction: 

Start by explaining the emerging concept central bank digital currency (CBDC)

Body:

In the first part, explain the technology behind CBDC – Blockchain giving rise to secure digital instruments. Also, mention from where CBDC will derive its value from. Mention the growing acceptance of CBDC in India.

Next, write about potential benefits that India can accrue from CBDC. financial inclusion, the cashless society, decrease the cost of printing, expanding the digital economy and empowering citizens etc.

Next, write about potential challenges with regards to CBDC. User adoption, security, complexity, domination by Chinese and Opportunity cost due to RBI’s reluctance etc.

Conclusion:

Conclude with way forward as to how India should step up to CBDC.