From barter, shekel, metal including gold, silver, bronze, nickel, to paper to polymer, the form of money is now attempting to enter another new era by going digital through the Central Bank Digital Currency (CBDC).
As cryptocurrencies and stablecoins have become increasingly popular among young users, central banks around the world seem to believe that they need go digital on their currencies, and towards this have been issuing their own concept notes and in the early days of their experimentation phases. However, one needs to understand that the CBDCs and crypto assets are different — and cannot be compared.
The Reserve Bank of India (RBI) on October 7 released a concept note on India’s Central Bank Digital Currency (CBDC). Finance Minister Nirmala Sitharaman had already announced earlier this year, that a digital rupee would be issued in 2022 or 2023 that will operate via blockchain or related technologies. The concept note comes at a time when India's crypto exchanges and the ecosystem has borne the severe brunt of higher taxes including high rate of TDS, an operational shadow ban on exchanges through payment systems all of which has indirectly pushed business and monies out of India into the hands of overseas exchanges, which seemed to have benefited the most.
For easier understanding, a CBDC is a ‘digital banknote’ that can be used by individuals for their retail requirements such as paying shops, businesses or between businesses or among financial institutions for their wholesale ones. A CBDC is a virtual money backed and issued by a central bank. The CBDCs are different from electronic payments such as UPI, wallet, NEFT, IMPS, RTGS, etc. as these are digital payments with banking solutions at their core. The liability of these account transfers lies with the corresponding government/commercial banks. Despite being called the sovereign equivalent of crypto assets, the CBDCs are centralised.
The RBI’s concept note has defined the CBDC as the legal tender issued by the central bank in a digital form, and referred to it as ‘e₹’. The RBI has also explained the objectives, choices, benefits, and risks of issuing a CBDC in India. The RBI has proposed to issue two versions: one for wholesale for interbank settlement, and the other for retail for the public. The RBI has also proposed that it will issue the e₹ but regular banks can distribute it. The RBI has also proposed the e₹ in its retail version to be token based, wherein one can find out the recipient’s public key, and transfer it using one’s private key. Anonymity has been proposed for small amounts only.
The RBI said that it will start a pilot of the digital rupee for specific use cases soon, though a clear timeline has not been mentioned. However, the implementation will be in a graded manner to avoid disruption. The CBDC has been associated as a "risk free central bank digital money which will provide the users the same experience of dealing in currency in digital form, without any risks associated as with private cryptocurrencies."
As per the Atlantic Council, today 105 countries, representing over 95 percent of global GDP, are exploring CBDCs of which 10 have fully launched, with China’s pilot set to expand in 2023. Of the G7 economies, the United States and the United Kingdom are most behind on CBDC development. Nineteen of the G20 countries are exploring a CBDC, with 16 already in development or pilot stage. Globally various efforts that involve multiple countries and banks have been underway from efforts like Multiple CBDC Bridge (mBridge), Project Dunbar, Project Helvetia, Project Jasper, Project Aber, Project Jura, Onyx/Multiple wCBDC etc. Bahamas was the first to issue the Sand Dollar CBDC three years ago.
It is, however, important to understand that in some countries a CBDC may be an important path to financial inclusion, while in case of others it may have other motivations. The CBDCs may also help support trade in another emerging area of NFTs.
The CBDCs can help in reducing operational costs in physical cash management, foster financial inclusion, and bring further innovation in the payments system without risks. It can be used for retail, wholesale, and international payments.
With each central bank around the world evolving its own use cases, concepts, and with certain banks and countries collaborating in their own way, there is a likelihood that the global financial system may face an interoperability issue, unless there is equal effort to work towards certain standards as well.
Rameesh Kailasam is CEO, Indiatech.org. Views are personal, and do not represent the stand of this publication.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
