By Pradip Seth

Riding the crest of the digitalisation wave and mirroring global trend of digital currency adoption, India is set to have its own digital currency as well by next fiscal. In the annual budget on February 1st, Finance Minister Nirmala Sitharaman introduced a digital currency, ‘digital rupee’ to be issued by the RBI.

The Central Bank Digital Currency (CBDC) will be in the digital form and will be fungible with the prevalent physical currency. It will be the e-sovereign currency which will appear as a liability on RBI’s balance sheet. 

Introduction of CBDC will give a massive push to digital economy. it will lead to a more efficient and cheaper currency management system. This development will also put money and payment services in the limelight. These CBDCs may be designed for use among only financial intermediaries (such as wholesale CBDCs), or they may be tailored to be used by the wider economic community (such as retail CBDCs).

CBDCs employ distributed ledger technology (DLT), which keeps multiple copies of financial records across multiple entities, like transaction history. Central banks can oversee these entities. However, the technology behind each CBDC may differ depending on the country and its central bank.

CBDC trials have begun in China, Japan, Sweden and Nigeria, and the Bank of England and the European Central Bank are preparing their own. The Bahamas introduced the world’s first CBDC, the sand dollar.

Impact of Digital Currency on Fintech Segment

India is one of the fastest growing Fintech markets in the world. In the past few years, the growth momentum of fintech industry in India has been accelearted sharply. Indian fintech segment is valued at $ 50-60 Billion in FY20 and is estimated to reach about $ 150 Billon by 2025. The transaction value is set to grow from $ 66 Billion in 2019 to $ 138 Billion in 2023, at a CAGR of 20%. There has been a cumulative funding of about $28 billion in Indian Fintech sector. As of December 2021, Indian Fintech market has 1,860 startups and 17 companies which have gained ‘Unicorn Status’ with a valuation of more than $1 billion.

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At the digital payments front, India has seen exponential growth marking a monthly volume of 6 billion transactions worth $2 trillion in September 2021.  India has the highest number of real-time online transactions with 25.5 billion real time payments transactions in 2020, and is ahead of US, UK and China combined.

By creating a more technologically advanced environment, digital fiat currency is set to spur the already flourishing fintech industry.

The data generated by CBDC would provide greater transparency, since all transactions will be traceable. The widespread and inexpensive availability of digital money and phone-based transactions could facilitate the integration of markets and trade among countries. CBDCs bring us one step closer to a universal currency, which has long been a concept of interest to fintechs. 

It’s a long journey, but it starts with the right preparation and partnerships. It indeed is a huge task for  central banks to inject CBDCs in the money circulation. But, it’s a necessary step to support the evolution of our monetary system.

Closing thoughts 

Digitised money will spur global trade since it will be more convenient and better risk mitigation due to the verifiable nature of transactions in block chain. This will lead to emergence of a new universal currency and newer markets. A new segment of investment sources will arise such as game finance and decentralised finance.

CBDCs have arrived to change the course of the future of finance and will have far-reaching implications as the ripple effect, including transactions of digital assets. This phenomena is preseting newer opportunities for fintechs to innovate more user-friendly services which are stable and scalable for cross-currency transactions.

So much is to be done, but the opportunities are exponential, providing that the risks are prudently managed. A team effort from private sectors and public sectors domestically and internationally is a prerequisite to drive towards immense possibilites which digitalisation holds.

(The author is Founder & CEO, ExchangeConnect)