US President banned the creation and use of Central Bank Digital Currencies (CBDCs) through his executive order and emphasized the development of dollar-backed stablecoins, a private sector alternative to CBDCs.
Why the US has banned CBDCs
- Privacy concerns: CBDCs can enable government surveillance of individual transactions.
- Financial sovereignty: Avoids centralization of the financial system under the federal government.
- Support for decentralization: Promotes innovation in private sector digital assets like stablecoins.
Central Bank Digital Currency (CBDC)
Definition
- CBDC (Central Bank Digital Currency) is a digital form of a country’s sovereign currency, issued and controlled by the central bank.
- Unlike cryptocurrencies, which are decentralized, CBDCs are centrally managed and backed by the government.
Types of CBDC
- Wholesale CBDC: It is designed for institutional use, facilitating large-scale transactions such as interbank transfers, cross-border payments, and securities settlement.
- Retail CBDC: It is for everyday use by individuals and businesses. Example: Token-based: Accessed with private and public keys.
- Account-based: Requires digital identity.
Characteristics of CBDC
- Legal tender: It is recognized by all citizens, businesses, and government agencies as a form of payment and store of value.
- Obligation: It is a direct obligation of the central bank, as opposed to deposits in commercial banks.
CBDC Initiatives in India – RBI’s Digital Currency e-Rupee (e₹)
- Launched by the Reserve Bank of India (RBI) in the year 2022.
- It is the digital version of the Indian rupee and can be converted into cash at equal value.
- Usage: e-Rupee (e₹) can be stored and transacted in digital wallets provided by banks and non-banks. It can be used for person-to-person (P2P) and person-to-merchant (P2M) payments.