New Delhi: India’s digital payments universe is all set to get another entry in the form of a central bank digital currency. In other words, CBDCs may soon include Unified Payments Interface or UPI, cheques, bank transfers and debit and credit cards for transacting with individuals and businesses.
Contrary to the dim view taken by the Narendra Modi government and the Reserve Bank of India (RBI) regarding private cryptocurrencies, they are both clear in their commitment to introduce a central bank-issued version of digital currencies.
His budget 2022 speech On 1 February 2022, Finance Minister Nirmala Sitharaman said that the introduction of CBDC would “give a big boost to the digital economy”.
“Therefore, it is proposed to introduce a digital rupee using blockchain and other technologies to be issued by the Reserve Bank of India from 2022-23,” Sitharaman said in her speech.
RBI also sticks to its commitment to expedite issuance of CBDCs in a phased manner, with several senior officials talked about it publicly, However, until recently, the RBI and the government knew very little about the working details of a CBDC, leading to a lot of speculation. This is a welcome move, which was released by RBI on Friday. concept paper On CBDCs that addresses most of the questions surrounding them.
In fact, the RBI has said that it will “soon start limited pilot launches of E ₹ for specific use cases”.
What are CBDCs?
RBI defines a CBDC as “a legal tender issued in digital form by a central bank”. In other words, it is digital cash. What makes it different from traditional rupee transactions in UPI payments is that CBDCs are based on blockchain technology. This provides CBDC transactions with a level of transparency and security that goes beyond the pre-existing digital security of India’s banking system.
As their name suggests, CBDCs are issued by central banks, which makes them very different from bitcoin, ether, and a plethora of other private cryptocurrencies. While private cryptocurrencies have no intrinsic value, RBI’s CBDC will be pegged to the rupee on a 1:1 basis – one rupee equals one CBDC. This means that the price of a CBDC will not be hostage to the speculation that results in such intense volatility in cryptocurrency prices.
This also means that if anything goes wrong with a CBDC transaction, the consumer will have to follow up with the RBI. At the moment, since there is no regulation or body of cryptocurrencies in India, consumers have no regulatory recourse in case anything goes wrong.
All CBDCs must have certain basic prerequisites, the first of which is that they must appear as a liability on a central bank’s balance sheet in the same way that any legal tender does. CBDCs should also be accepted by all citizens, enterprises and government agencies as a medium of payment, legal tender and a safe store of value. In other words, if you pay your local kirana store with a CBDC, they will be legally bound to accept that payment at its face value, which is equivalent to the equivalent value of Rs. One CBDC will be equal to Re 1 and nothing else.
Furthermore, the CBDC can be changed in such a way that it is cash – the hundred rupee note is the same as any other for all practical purposes. In the same way, a CBDC will be similar to all others.
Additionally, CBDC users do not have to have a bank account. This is one factor that sets CBDCs very different from traditional rupee. You need to have a bank account to make digital payments now.
RBI is planning to issue two different types of CBDCs based on their use cases. “CBDCs can be classified into two broad types – general purpose or retail (CBDC-R) and wholesale (CBDC-W),” the central bank said in its concept note. -Financials will be available for use by consumers and businesses, while wholesale CBDCs are designed to have limited access to select financial institutions.”
Therefore, while the CBDC-W would be for settlement of interbank transfers and related wholesale transactions, the CBDC-R would primarily be an electronic version of cash for retail transactions.
Why is RBI thinking of CBDC?
RBI has given several reasons why it is developing a CBDC – optimizing digital currencies, reducing the costs associated with physical cash, and mitigating the volatile effects of the adoption of private cryptocurrencies, etc.
The RBI concept note states, “CBDCs affect the overall value of the money issuance function to the extent that it reduces operational costs, such as costs related to printing, storage, transportation and replacement of banknotes, and the costs associated with delays in conciliation and settlement.” , though acknowledging that the initial setup cost will be significant.
RBI has clarified in its note that CBDCs are not expected to replace other methods, but to complement them. The development of CBDC is another step towards digitization and less cash economy.
The RBI note said, “As has been the experience with many payment products, once a CBDC is introduced, innovations around the product will only expand the options available and healthy competition will help bring both cost and time efficiencies.” will help.”
Another advantage of CBDCs over traditional digital transactions comes from the blockchain infrastructure, which makes CBDC payments final and instantaneous. This mitigates settlement risk, where the money has gone from your account but has not reached the recipient. This is of particular importance in the system in which inter-bank payments are so common – where the sender and recipient accounts are in two different banks.
“This can be compared to cash-based transactions, where instead of bank notes, CBDCs are handed over for immediate settlement. This is expected to bring more efficiency in the payment system,” notes the RBI.
Finally, the RBI’s understanding that CBDCs can become a risk-free alternative to private cryptocurrencies misses the inherent allure of private cryptocurrencies—quick and huge profits that ride on volatility. This attractiveness is missing in CBDCs as they are inherently stable as fiat currency.
some more challenges
Although the RBI concept paper lays out the basics of monetary policy, liquidity management and the impact of CBDCs on monetary variables, it does not go into details on how these will be managed.
Being equal to cash in all respects except the medium of CBDC, RBI will have to do its currency management on a dual basis. At present, RBI releases more rupees keeping in mind the inflationary impact of such a move. If a CBDC becomes popular, the RBI will have to manage its rupee printing in close coordination with the number of CBDCs it issues and address the inflationary impact of both.
More discussion is needed on how this will work. The same is true for other monetary ratios such as cash reserve ratio, statutory liquidity ratio and more.
This article is part of ThePrint Feature’s Tracking Cryptonomy series. read all articles Here,
(Edited by Likes)