Our Finance Minister Nirmala Sitharaman has made CBDC as a household term as it has been the latest buzzword with many of us wondering – What is it and how will it work? For those, who are unaware of the crypto or blockchain world, the fad CBDC is Central Bank Digital Currency, which is a government-issued digital currency and is backed by the central bank of the concerned nation.
In India’s case, it is the Reserve Bank of India (RBI). Putting it in simpler terms, a CBDC is the legal tender of a particular country as it is issued by the central bank but in the digital form. It is an electronic record or digital token of the official currency issued by the monetary authority of a nation.
A survey conducted by Bank of International Settlements (BIS) in 2021 revealed that 86 percent of the central banks were exploring the potential of CBDCs and about 15 percent of the states are set to launch their pilot projects. The CBDC will fulfil the basic functions as a medium of exchange, unit of account, store of value, and standard of deferred payment. CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer). Even our Prime Minister Narendra Modi said that the CBDC launched by RBI will be as good as India’s fiat currency – Indian National Rupee (INR) and will be exchangeable to the cash at par. It is sovereign currency in an electronic form and will appear as liability (currency in circulation) on a central bank’s balance sheet, says the RBI website.
Need of CBDC
CBDC will be backed by distributed ledger technology (DLT) but will be a permissioned blockchain which will make it different from other permissionless crypto assets. The central monetary authority will have control access to the blockchain. Central banks are facing dwindling usage of paper currency and now seek to popularize a more acceptable electronic form of currency. Digital currency will be more efficient and will be able to avoid the damaging consequences of private currencies.
Advantages of CBDC
CBDC will be the final payment and eliminate the risk of settlement in the financial system, particularly banks. The CBDC will be the actual store of value and will transfer the value from one entity to another. It will lead to lower transaction cost and make the flow of money easier. CBDCs will move towards real time transactions and a globalized cost effective payment settlement system. For instance, Indian importers can pay an American exported on a real time basis in digital dollars without the need of an intermediary.
It would not even require that the US Federal Reserve system is open for settlement. Time zone differences would no longer matter in currency settlements. This transaction would be final as CBDCs are as good as the fiat currencies.
According to a note released by the State Bank of India (SBI), the CBDC has the potential to offer benefits in terms of liquidity, scalability, acceptance, ease of transactions and faster settlement in comparison with existing forms of money. It can be a pragmatic shift to a cashless economy in the near future. The adoption of CBDC will improve and make it easier for people to use with the supporting infrastructure provided by the government. It will boost the government’s mission to move towards the digital economy. It can establish an environment created for interoperability whereby faster real-time remittance occurs.
India vs World in CBDCs
India is expected to launch CBDC or the digital rupee in the financial year 2022-23 but the government is hinting at it from 2021. The RBI will analyse and assess the CBDC’s scope in retail and wholesale payments, the underlying technology, use cases, validation mechanism (token based or amount based), denominations and architecture of issuance.
Among the global peers, Nigeria is set to launch its digital currency named Naira. Venezuela is also planning to launch its CBDC, ie, the digital Bolivar. South Korea is pilot testing digital Yuan. The European Central Bank (ECB), the US, Russia, China and Turkey are also mulling their plans for CBDCs.
(By Kunal Jagdale, Founder, BitsAir Exchange)
