How CBDCs Can Help Banks and Fintech Firms Reinvent

The concept note provides a deep insight into RBI’s motivations for the introduction of CBDC in India. It also outlines potential design features, policy issues and implications, and potential technology platforms. This clarifies a policy preference for indirect/hybrid CBDCs issued by RBI and distributed by banks and other intermediaries. It envisages a token-based (similar to fiat currency) model for retail CBDCs and a separate account-based model for wholesale CBDCs. In choosing a non-interest bearing structure, the RBI considers its CBDC a swap for paper cash (an RBI liability that does not carry interest). The concept note’s proposal of limited anonymity (similar to the European Central Bank-led ‘anonymous vouchers’) for use in small transactions and full visibility to intermediaries and authorities for large transactions strikes a balance between privacy and regulation.

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The guiding principles reflected in the concept note see CBDCs as an additional payment avenue that does not replace existing payment systems. Being a liability of RBI rather than commercial banks, CBDC protects users from insolvency risks in the financial system. The central bank has reiterated its concerns about private virtual currencies (cryptocurrencies) and has proposed the adoption of CBDCs as a tool for monetary and financial stability, which allows settlement (no central counterparty provided) and physical Minimizes the risks arising from cash management. This would result in the creation of a core payment system outside India’s commercial banking system, resulting in diversification of payment options, reducing credit and liquidity risks, and hedging against payment system and bank failures. It could also reduce cross-border payment friction, promote financial inclusion, given its offline convenience, and provide a digital footprint of retail users that could enable easy credit.

The concept note also considers various technology and cyber-security risks, governance and system stability factors, integration with existing payment systems and interoperability.

While acknowledging the legal implications of CBDCs, given that the current legal framework governing money was enacted in a pre-digital era, the concept notes fall short of hard-wired recommendations, calling this assessment a final CBDC architecture. adopted (after trials) necessary legal amendments to CBDC issuance rights, legal tender status and criminal law protection from counterfeiting, anti-money laundering and financing of terrorism (AML/CFT) considerations, among other safeguards Including terms of its operational and technical design features. ,

Participants in the financial system will have to assess the CBDC and adapt themselves to their arrival. From delegating traditional roles to developing new roles, there is much to be done in the financial and payment systems. The impact of CBDCs for banks, payment intermediaries and other participants in the financial services ecosystem is likely to be profound. The role of banks and other intermediaries in the distribution of retail CBDCs could lead to new partnerships between banks, fintech firms and technology companies. The proposed two-tier model would require technology and infrastructure investment by banks and other financial intermediaries. Acceptance and exchange of e-rupee in a one-to-one ratio for fiat currency would require systemic interoperability. On the legal front, the RBI Act, the Foreign Exchange Management Act, the Payment System and Settlement Act, the Coinage Act and the Prevention of Money Laundering Act (including AML/CFT reporting and monitoring) may all require further adaptations for CBDCs.

CBDCs provide an opportunity for banks and fintech firms to reinvent parts of their traditional business. Several financial intermediaries (payment processors and aggregators, card networks and e-wallet service providers) are expected to play a key role in the growth of e-rupee going forward, as an entirely new payment use-case will be created. The potential impact on India’s growing e-commerce landscape will also be significant.

The introduction of CBDC is likely to have a positive impact on India’s formal economy and can also strengthen our financial system. There will be both challenges and opportunities for the banking system and non-bank intermediaries. For players in an agile financial system hungry for investment and growth, led by modern technology, the opportunities abound.

The launch of a CBDC will be a positive step and is likely to have far-reaching implications for both our domestic payment system and cross-border payment infrastructure. From a public policy perspective, a digital currency issued as legal tender is a compelling proposition, given India’s demographic advantage, with potential for financial inclusion.

Globally, central banks and governments are obsessed with technological advances and their impact on financial stability. While innovation will lead to efficiencies and faster services, central banks must be mindful of the risks to the consolidation of the financial system. Both demographics and geography place India particularly well to use technology for financial intermediation. The launch of a CBDC will provide an opportunity for India to progress through digital means to achieve its policy objectives.

L Viswanathan and Anu Tiwari are partners in Cyril Amarchand Mangaldas.

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