What is CBDC?
CBDC is a digital form of fiat currency issued by a country's central bank. Unlike cryptocurrencies such as Bitcoin or Ethereum, CBDC is centralized and regulated by the government. It aims to provide a digital equivalent of physical cash, backed by the full faith and credit of the issuing government.
Paving the path towards efficient payments
The introduction of a CBDC holds the potential to unlock a plethora of benefits for the Indian monetary system. The streamlined nature of digital transactions in a widespread CBDC-use environment could lead to significantly reduced transaction costs, as well as eliminating the need for intermediaries we need as part of current payment systems. This, in turn, could result in faster and more efficient transactions, fostering an environment conducive to economic growth.
Objectives of CBDC
Financial Inclusion: To provide all citizens, including those in remote areas or without access to traditional banking services, with a safe, secure, and inclusive means of participating in the financial system.
Efficiency and Cost Reduction: To streamline payment processes, reduce transaction costs, and enhance the overall efficiency of the financial system by leveraging digital technologies.
Monetary Policy Transmission: To enhance the effectiveness of monetary policy transmission mechanisms by providing the central bank with more direct control over the money supply and circulation.
Digital Innovation: To foster innovation in financial technology (FinTech) and blockchain technology, positioning India as a leader in the global digital economy and promoting technological advancement in the financial sector.
Reducing Cash Dependency: To decrease reliance on physical cash and promote the adoption of digital payment methods, thereby reducing the costs and risks associated with cash handling and management.
Environmental Sustainability: Design CBDC infrastructure and protocols to minimize environmental impact, reducing energy consumption and carbon emissions associated with digital currency mining and transaction processing.
Regulatory Compliance: Establish clear regulatory frameworks and compliance standards for the issuance, circulation, and usage of CBDC, ensures adherence to anti-money laundering (AML) and know your customer (KYC) regulations, as well as safeguarding financial stability and consumer protection.
Public Awareness and Adoption: Educate the public about the benefits and functionalities of CBDC, build trust and confidence in the digital currency system, and promote widespread adoption among individuals, businesses, and financial institutions.
Challenges and Considerations
Technology Infrastructure: Implementing CBDC requires robust technological infrastructure to ensure scalability, security, and resilience against cyber threats. India would need to invest significantly in upgrading its digital infrastructure to support a nationwide CBDC system.
Privacy and Security Concerns: CBDC raises concerns regarding data privacy, surveillance, and cybersecurity. It is crucial to implement stringent safeguards to protect users' privacy rights and ensure the security of the digital currency system.
Regulatory Framework: Introducing CBDC necessitates a comprehensive regulatory framework to address issues such as anti-money laundering (AML), know your customer (KYC) requirements, and consumer protection.
Integration with Existing Systems: Seamless integration of CBDC with existing payment systems, banks, and financial institutions is essential to ensure interoperability and widespread adoption.
CBDC Update: Soon use RBI's Digital Rupee for offline transactions
CBDC-R will soon support offline transactions in areas with limited or no internet connection. To achieve this aim, a number of offline solutions-both proximity- and non-proximity-based-will be evaluated in hilly, rural, and urban environments.
The CBDC Retail (CBDC-R) pilot currently enables Person to Person (P2P) and Person to Merchant (P2M) transactions using Digital Rupee wallets provided by pilot banks. It is now proposed to enable additional use cases using programmability and offline functionality. Programmability will permit users like, for instance, government agencies to ensure that payments are made for defined benefits.
Rahul Jain – CFO, NTT DATA Payment Services India says, "RBI's proposed Central Bank Digital Currency (CBDC) enhancements signal a positive step for India's financial future. Programmability and offline functionality in CBDC Retail (CBDC-R) promise speed, security, and convenience for users. Faster transactions, both online and offline, will be possible with programmable features and secure offline options. This visionary move empowers users with flexibility and ease, boosting India's fintech ecosystem. In the fast-evolving landscape of finance, CBDC stands at the forefront of transformation. This transformative initiative is set to infuse renewed momentum into India's financial technology ecosystem."
Is This The Right Time, Is It Absolutely Necessary?
There are compelling reasons for India to pursue both a retail and wholesale CBDC. In terms of retail payment, India has already achieved a rapid adoption of digital payments thanks to the Unified Payments Interface (UPI). CBDC can further streamline the payments process and level it up by a few notches. It can offer a new payment method and broaden the number of payment possibilities, especially for e-commerce. It is comparable to a cash transaction, except that, instead of banknotes, CBDC is exchanged, resulting in immediate settlement. This can boost the payment system’s efficiency.
In wholesale banking, cross-border payments is especially ripe for change and could benefit from these modern technologies. According to the World Bank, India is the greatest recipient of remittances in the world, having received $87 billion USD in 2021, with the United States being the largest source, accounting for almost 20% of these payments. In 2022, it went up by 12% to reach $100 billion. The cost of sending remittances to India is therefore of essential importance to millions of Indians living abroad. Current remittance options can be expensive or fraught with risks due to (mis-)use of informal/illicit routes.
It is hard to predict now if the bang for the buck will lie in serving a huge untapped domestic market or the potential for cross-border engagement through wholesale CBDCs.
Conclusion
India's exploration of CBDC reflects its commitment to leveraging technology to modernise its financial system and promote inclusive growth. While the journey towards CBDC implementation presents various challenges and considerations, the potential benefits in terms of financial inclusion, efficiency, and innovation make it a promising avenue for India's economic development.
The dawn of the Digital Rupee promises a transformative journey. The concept of a cashless economy, once confined to the realms of imagination, could with the right incentives and push, soon become reality. The Digital Rupee has the potential to empower individuals and businesses alike, enabling seamless and borderless transactions. With further improving financial inclusion as one of its objectives, this digital evolution could bridge gaps and pave the way for a more inclusive economic landscape
Sources:
Investopedia
Economic Times
Authored By: Nishtha Poddar & Keshvi Wadhwa
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