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Digital Currency - is it a game changer?

ICICI Securities 13 Dec 2021
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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.

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