Britain Considering New Digital Currency Britcoin
Why in News?
British authorities are exploring the possibility of creating a Central Bank Digital Currency, being touted as “Britcoin.”
It is a step towards future proofing Pound Sterling (currency of the United Kingdom) against cryptocurrencies and improving the payments system.
About Britcoin:
In the wake of declining cash payments in the country partly due to the Corona pandemic, the Bank of England and the Treasury are considering creating Digital Currency.
The Digital currency, if passed, would exist alongside cash and bank deposits and act as a new form of money to be used by households and businesses in England.
It would sit at the interface between cash and private payments systems and would not necessarily be based on distributed ledger technology.
This ‘britcoin’ would be tied to the value of the pound to eliminate holding it as an asset to derive profit.
The move could have an economic impact in the form of wider investment into the UK tech sector and lower transaction costs for international businesses.
Britain’s digital currency would be different in a key sense as if passed, it would be issued by state authorities.
Currently, only the Bahamas has such a currency, though China is trialing it in several cities.
Digital Currency:
Digital currency is a payment method which is in electronic form and is not tangible.
It can be transferred between entities or users with the help of technology like computers, smartphones and the internet.
Although it is similar to physical currencies, digital money allows borderless transfer of ownership as well as instantaneous transactions.
Digital currency is also known as digital money and cybercash. E.g. Cryptocurrency.
Central Bank Digital Currency:
A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region).
Fiat Currency: It is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
Each unit acts as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account.
Benefits:
CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system.
New forms of digital money could provide a parallel boost to the vital lifelines that remittances provide to the poor and to developing economies.
It will ensure that people are protected from financial instability caused due to the failure of private payments systems.
Risk Associated:
There is a need to enforce strict compliance of Know Your Customer (KYC) norms to prevent the currency’s use for terror financing or money laundering.
Existence of digital money could undermine the health of commercial banks as it removes deposits on which they primarily rely for income.
India’s Stand on Digital Currency:
Reserve Bank India (RBI) had considered cryptocurrencies as a poor unit of account and also demonstrated by their frequent and high fluctuation in value.
According to RBI, it pose several risks, including anti-money laundering and terrorism financing concerns (AML/CFT) for the state and liquidity, credit, and operational risks for users.
However, it is considering developing a sovereign digital currency when the time is appropriate.