CBDCs won’t replace money, will need to build trust: OECD analyst

Globally, 114 countries, representing over 95 percent of global gross domestic product, are exploring CBDCs, according to the Atlantic Council CBDC tracker.

Central bank digital currencies (CBDCs) are not seeking to replace existing forms of money but complement them, according to a senior policy analyst at the Organisation for Economic Cooperation and Development (OECD).

“Stated objectives of most if not all CBDC experimentation we see at least in OECD countries at the moment clearly states that CBDCs would be an additional option and not a tool that will replace existing forms of central bank money,” Iota Kaousar Nassr said at an overnight event on decentralised finance in Switzerland.

OECD is a grouping of rich countries. Decentralised finance, or DeFi as it is commonly referred to, is based on distributed ledger technology.

“I personally think this is very important because it addresses the fact that some people may not be able or may not wish to use it (CBDCs). So, for the retail CBDCs, preserving the availability of the physical cash also will address that part of the population.”

Globally, 114 countries, representing over 95 percent of the global gross domestic product, are exploring CBDCs, according to the Atlantic Council CBDC tracker.

India is among 18 of the G20 countries that are now at an advanced stage of CBDC development.

The success of CBDCs across the world will depend on these digital currencies winning the confidence of people, OECD’s Nassr said.

“Ultimately, whether a possible CBDC will be successful or not may depend to a large extent on whether citizens and users will trust this kind of instrument,” the analyst said. "Building trust for central bank money is something that took a very long, historical process. So, building trust is very tough and requires time and energy and the whole system has to be in place."

CBDCs will need to ensure the protection of privacy, ensure equitable treatment of its users, have wide availability and accessibility, and also be affordable, she added.

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India’s Digital Rupee

The Reserve Bank of India (RBI) towards the end of 2022 launched pilots for both a wholesale CBDC as well as a retail CBDC.

The pilot for the wholesale segment, known as the Digital Rupee – Wholesale, was launched on November 1, with use cases being limited to the settlement of secondary market transactions in government bonds, aimed at making the interbank market more efficient and reducing transaction costs.

The pilot in the retail segment, known as Digital Rupee – Retail, was launched on December 1 within a closed user group comprising participating customers and merchants.

The CBDC pilot launched by the RBI in the retail segment has components based on blockchain technology and the retail CBDC is in the form of a digital token that represents legal tender.

The retail Digital Rupee is being issued in the same denominations as the paper currency and coins and is being distributed through banks.

The retail Digital Rupee offers features of physical cash like trust, safety and settlement finality, according to the finance ministry.

“Like cash, the CBDC will not earn any interest and can be converted to other forms of money, like deposits with banks,” Union Minister of State for Finance Pankaj Chaudhary said in a written reply to a question in the Lok Sabha in December.

As the G20 president, India is seeking a global consensus for regulation of crypto assets, which the country has imposed a tax on.

Despite the crypto winter late last year, central banks across the world are moving ahead with the CBDC proposals as they seek to provide an alternative to conventional forms of money.

Also read: Regulating crypto without global consensus will not be effective: FM Nirmala Sitharaman

Wholesale CBDCs and tokenisation

Meanwhile, CBDCs could have a key role in these alternative models for digital money, Hyun Song Shin, head of research at the Bank for International Settlements, said at the event.

Shin cited so-called tokenised deposits underpinned by settlement using CBDCs and tokenisation of securities and other claims as key use cases.

Tokenised deposits are a way to piggyback on wholesale CBDCs, enabling innovative use cases like smart contracts, he added.