India’s digital currency to be launched in FY23 to be cost effective, transparent and secure

• Almost 100 countries are exploring CBDCs at one level or another. Some researching, some testing, and a few already distributing CBDC to the public, says the IMF.
• Finance Minister Nirmala Sitharaman says that the digital currency will give a big boost to the digital economy.
• The idea of issuing central bank digital currency was brought into action after every other country was piloting the digital currency after the wide popularity of cryptocurrencies.
• Experts say CBDCs, bitcoin and private coins etc are not same as the later ones are unregulated assets.

The central bank digital currency (CBDC) is about to be launched this financial year in FY23, finance minister Nirmala Sitharaman had announced in her Budget speech on February 1. She had addressed that the digital currency will give a big boost to the digital economy.

"Introduction of Central Bank Digital Currency (CBDC) will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23," said Sitharaman in a budget document.

The idea of issuing central bank digital currency was brought into action after every other country was piloting the digital currency after the wide popularity of cryptocurrencies.

According to the International Monetary Fund (IMF), almost 100 countries are exploring CBDCs at one level or another. Some researching, some testing, and a few already distributing CBDC to the public.

Rabi Sankar, deputy governor at RBI says that while interest in CBDCs is near universal now, very few countries have reached even the pilot stage of launching their CBDCs. About 86% of centrals were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects.

What is Central Bank Digital Currency and is it similar to cryptocurrencies?
A central bank digital currency (CBDC) is a digital currency issued by a central bank, which will be used for transactions similar to other physical currencies.

“A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different,” said Sankar in a report.

On an important note, cryptocurrencies are private money, whereas CBDCs are government-backed forms of money

The primary benefit of virtual currency is that with this, it is possible to record and track transactions easily.

Although the concept of digital currency is inspired from private virtual currencies like cryptocurrency it cannot be compared to these virtual currencies that do not have an underlying asset and are not legal tender as they are unregulated and decentralised.

“CBDC is simply the physical rupee you have in your wallet purse today, it will be a digital representation of that physical note. And therefore most countries are exploring. The features and functions you have with a physical note today, the digital rupee will have the same features and function,” said Aman Cheema, head of global real-time payments and CBDCs at FIS in a conversation with Business Insider.

Cheema says that there is a lot of confusion between CBDCs, Bitcoin and private coins etc as he says that CBDC is not bitcoin, which comes under unregulated assets.

CBDC to be more cost effective than other payment alternatives
Deputy governor of RBI T. Rabi Sankar recently said that CBDC could become a tool for reducing time and cost for cross-border transactions.

“Imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over – the need for interbank settlement disappears. CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems,” said Sankar last year.

Also, another cost effective benefit could be from replacing it with cash. India’s high currency to GDP ratio holds out another benefit of CBDCs. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.

How will blockchain technology aid in the launch of CBDC?
Blockchain is a type of ledger technology that stores and records data. Technologies like blockchain are considered by several countries exploring CBDC that will facilitate processing and settlement of financial transactions between end users of digital currency. Blockchain technology would allow RBI to track transactions and protect the privacy of CBDC users.

Blockchain technology allows many different entities to hold a copy of the history of transactions. As a result, RBI and other central banks are exploring CBDC using this technology as transactions will be secure, safe, transparent with historic records.

With this, the blockchain removes the need for intermediaries like banks to help with each transaction and cut down on costs. Meanwhile, the blockchain technology is already being used by hospitals to track medical record data and agricultural firms to track the supply chains of food.

“FIS is launching a CBDC virtual lab, which is a digital money platform which will allow central banks and commercial banks to start to experiment what a CBDC could be in that market. I Think of it as an R&D capability, which will allow central banks to say what if I were to design my CBDC and what it would be like and how it would work,” said Cheema.

How does it benefit the Economy?
CBDCs will benefit the economy with retail consumers being able to make easy, secure and fast payments.

The IMF in a report titled ‘The future of money: Gearing up for central bank digital currency’ said that if CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money as compared to volatile crypto assets.

Reports say CBDCs could also be scheduled to pay taxes or make other payments to the government as a part of routine transactions.

“There are a number of triggers and drivers of why a nation wants to launch a CBDC that can range from use of cash being declining. But they still need to have an element of cash being circulated in the economy so digitising cash is a way to address that problem. Another trigger is to bring the nation into a wider digital economy and moving cash into digital format as an enabler to do that,” said Cheema.

Countries using CBDC
Most countries are currently exploring the idea of central bank owned digital currency for their nation.

According to an IMF report, in the Bahamas, the Sand Dollar—the local CBDC—has been in circulation for more than a year.

Sweden’s Riksbank has developed a proof of concept and is exploring the technology and policy implications of CBDC.

In China, the digital renminbi [called e-CNY,] continues to progress with more than a hundred million individual users and billions of yuan in transactions.

And, just last month, the Federal Reserve issued a report that noted that “a CBDC could fundamentally change the structure of the U.S. financial system”.

Here are some key issues under examination by RBI before launching CBDC as per report by RBI deputy governor Rabi Sankar:

• The scope of CBDCs – whether they should be used in retail payments or also in wholesale payments
• The underlying technology – whether it should be a distributed ledger or a centralized ledger, for instance, and whether the choice of technology should vary according to use cases
• The validation mechanism – whether token based or account based
• Distribution architecture – whether direct issuance by the RBI or through banks
• Degree of anonymity etc. However, conducting pilots in wholesale and retail segments may be a possibility in near future.
  

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