In view of the upcoming introduction of CBDC (Central Bank Digital Currency) by RBI, discuss its concept, advantages and associated challenges.

The Reserve Bank of India has presented a concept paper on various issues related to introduction of CBDC in the country. The RBI is likely to introduce it as a pilot project first to assess its viability before introducing it on a full-scale.

What is CBDC:

• A CBDC or national digital currency is a digital form of paper currency.
• The central bank issues electronic tokens instead of printing paper currency or minting coins.
• Unlike crypto currency, it is regulated and backed by the central bank of the country.
• These are legal tenders and a fiat currency (exchangeable with fiat currency of similar value and its value is tied to any commodity). 

Advantages:

• India has a high currency to GDP ratio despite digitization (cards, net banking, UPI), hence CBDC can have additional benefits for India.
• Cash can be replaced by CBDC which will considerably reduce the cost of printing, transporting and storing paper currency.
• Easier and fast intra and international payment settlement.
• Backed by blockchain technology.
• It will push the informal economy to formal.
• Better tax compliance and reduced black money.
• Boost financial inclusion.

Associated Challenges:

• Potential cybersecurity threat.
• Lack of digital literacy.
• Privacy concerns.
• Higher cost of upgradation.
• Weaken the role of commercial banks.

A CBDC will enable the citizens to better contribute to the digital economy. However, it is of utmost importance to thoroughly consider all the aspects of Digital currency before its introduction.