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Digital Currency - is it a game changer?
What’s Buzzing:
Government is likely to introduce crypto-currency bill in the parliament this winter session. The bill likely seeks private crypto-currency avoidance and wishes to facilitate framework for India’s own digital currency to be issued by RBI.
Context:
Digital currency (encrypted form) has seen garnering attention from investor community and global crypto market has reached over $2.6 trillion, in India it is ~$15 billion. Bitcoin and Ether are top two crypto-currencies with market cap of $900 billion and $470 billion respectively. RBI had earlier vouched for central bank digital currency but maintained caution against private cryptos.
Our Perspective:
Central Bank digital currency (CBDC) represent a unique opportunity to design a technologically advanced representation of central bank money. CBDC is expected to promote financial inclusion as it does not necessarily require bank account.
Key advantages of digital currency:
1. CBDC can provide a government-authorised solution for storing value and making high volume low value payments.
2 Benefits government by reducing cash management cost which is ~1-1.5% of the GDP.
3. Reduces settlement risk thus lowering liquidity requirements
4. Currency conversion would be faster in case of CBDCs which in-turn should help faster international payments and impacting forex intermediaries.
5. Since CBDC would be backed by sovereign, risk of volatility as compared to other crypto currencies would be much less.
Benefits aside, digital currency also comes with its own demerits which primarily include risk of cyber-attacks and may lower spreads for banks due to its impact on CASA. Countries with strong digital capabilities and network will be able to adopt the new technology faster than others. And, dollar gets an edge, being widely accepted in all crypto currencies trading across various platforms.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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