By Prabal Goel, Chief Compliance Officer – Business & Legal Government of India announced the launch of the Digital Rupee — a CBDC from FY 2022-23 onwards in the Union Budget placed in the Parliament on February 01, 2022. The motivations for mulling this technological innovations are multifarious; they range from an attempt to achieve reduction in cost associated with physical cash management to supporting competition, efficiency and innovation in payments to supporting financial inclusion. Of course, the biggest advantage that CBDC offers is to eliminate the need to carry cash for transactional settlement. What separates CBDC from actual physical cash is the way CBDC is structured. Indications are that CBDC, in Indian scenario, would be classified in 2 ways- Retail and Wholesale. Where the use case of Wholesale CBDC would be the settlement of interbank transfers and related wholesale transactions, Retail CBDC would work as electronic version of physical cash. It appears that RBI, briefly, mulled paying interest on CBDC balances, but the idea appears to have fizzled out due to such move potentially lowering the attractiveness of savings deposits in banks. CBDC, however, may not be able to offer the anonymity that physical cash currently provides; one understands that RBI might be mulling incorporating in an intermediate degree of anonymity to the design of CBDC. There are certain aspects to CBDC which are still not completely understood- would CBDC be “programmed” to certain use cases? That is, to say, could certain type of CBDC only be spent in a particular way? Further, would CBDC have expiry date? If it does have an expiry date, that would make it different than cash, which typically does not have an expiry date, except in case of demonetization scenarios. At this stage, what we do know about CBDC points towards CBDC being an alternative to the digital wallets. In fact, CBDC might well obviate the need for a digital wallet altogether, given that CBDC is being primed for use even in absence of mobile network. The concerns around privacy and possible surveillance of the users of the digital currency, facilitated by CBDC, will remain for a while, especially in the light of similar concerns around the Chinese digital currency, which has been subject to criticism on both these counts. The onset of any revolutionary technology is often accompanied with suspicion- it is likely to not be adopted straightaway by larger public. The Government and the RBI may have to undertake a significant education campaign. in order to widen the usage of such digital currency, perhaps in tandem with token service providers. A couple of aspects that will determine the widespread adoption of CBDCs are expectations of privacy and suspicions of technology failure with respect to CBDC. At this stage, it is not completely understood if the CBDC ecosystems may be subject of cyber-attacks. Additionally, the technology behind CBDC is complex and little understood at large- concerns that the balances of CBDC are tamper proof may be hard to completely eradicate. Moreover, users of CBDC may want clarity on how data in CBDC system is protected. Another aspect that would guide the usage of CBDC would be- if there would be some sort of fees charged on UPI transfers in future. If UPI transfers are subject to fees in future, unlike now when they are free, such impost may accelerate the usage of CBDCs. RBI is keen to popularize the use of CBDCs- in this regard, it recently, sought inputs from banks as well as fintechs. Whilst there may be compelling motivations to introduce CBDCs to larger public in a hurry, RBI seems, at this stage, to be evaluating this introduction and in parallel, obtaining the views of all stakeholders on the idea.
Tag: currency
Fintech and Digital Currencies: Exploring the Potential of Central Bank Digital Currencies
The emergence of financial technology (fintech) in recent years has transformed the way we conduct financial transactions. The rise of digital currencies is one of the most significant developments in the fintech industry. While cryptocurrencies such as Bitcoin have gained popularity, central banks around the world are investigating the possibilities of central bank digital currencies (CBDCs). So, here we explore the potential of CDBCs. Financial Inclusion and Banking Service Access CBDCs have the ability to address the difficulties of financial inclusion by offering universal access to basic financial services. Individuals who do not have traditional bank accounts can use CBDCs to get a digital wallet that is directly linked to the central bank, allowing them to engage in the digital economy and access important financial services. This empowers unbanked and underbanked people while also encouraging economic growth and decreasing disparities. Efficiency and Cost-cutting CBDCs can streamline financial transactions by minimizing middlemen and associated expenses by harnessing the benefits of block chain technology. Real-time settlement and instant peer-to-peer transactions are conceivable, removing the need for third-party payment processors and lowering transaction fees. This increased efficiency can benefit firms, consumers, and governments alike, boosting economic growth and decreasing friction in the financial system. Financial Stability and Regulation CBDCs strengthen central banks’ visibility and control over financial transactions. The use of block chain technology allows for increased monitoring capabilities, which aid in the discovery of illegal acts such as money laundering and fraud. Furthermore, CBDCs can serve as an additional policy tool for managing monetary policy, thereby enhancing financial stability and resilience. Transactions and Remittances Across Borders CBDCs have the potential to make cross-border transactions more efficient, transparent, and cost-effective. CBDCs can efficiently facilitate remittances, which are critical for many developing economies, by decreasing fees and delays associated with traditional money transfer systems. This has the potential to boost economic growth and enhance the livelihoods of individuals and families who rely on remittances. Innovation and the Fintech Ecosystem CBDCs can promote innovation in the fintech environment. CBDCs enable the development of smart contracts and decentralized apps (DApps) by offering a programmable infrastructure, thereby opening up new possibilities for automated financial services and novel financial solutions. This fosters technical developments and a thriving fintech sector. Key Principles of CDBCs Indian Digital Currency Program The Reserve Bank of India (RBI) launched a digital rupee pilot programme in the wholesale sector, on November 1, 2022. Our Indian Digital Currency (IDC) would be used as a cryptocurrency in our country. This digital money would give our country’s economy a boost and help it grow. What is the RBI’s take on CBDC? A redesigned and computerized form of physical currency, similar to sovereign paper currency. Exchangeable at par with present currency and acknowledged as a medium of payment. A lawful tender and a safe deposit of value. Conclusion Central Bank digital currencies have the potential to transform the financial landscape, providing several benefits ranging from financial inclusion and efficiency to improved regulatory supervision. However, CBDC deployment necessitates careful consideration of a number of aspects, including privacy problems, cybersecurity, scalability, and interoperability with existing financial systems. Collaboration between policymakers, financial institutions, and technological specialists is critical as central banks throughout the world continue to explore and trial CBDC projects. To exploit the revolutionary potential of CBDCs while resolving issues and ensuring that digital currencies contribute to a more egalitarian, efficient, and sustainable financial future, an inclusive and transparent strategy is required.