Central bank digital currencies: The Innovative Future of Money in India

_Central bank digital currencies: The Innovative Future of Money in India
Mr. Priyank Kothari, Director of Arvog.

In the budget of 2022-23, we saw new ventures when the union government announced that we would have our digital rupee.

India is one of the fastest-growing economies in the world, and we need technology-driven innovations to keep up. Now, being digital, it is likely to be easier, faster, and cheaper because the Central bank digital Currency has now come into existence in India too.

What is CBDC

– It is Digital Rupee (eRe), the Same as physical cash in electronic form.

– The e-Rupee will not earn any interest when in a wallet, the same as the case of cash. And can be converted to other forms of money, anytime, like bank deposits or other investments.

The RBI has launched CBDC for retail customers and merchants, after a month of e-rupee transactions in the wholesale segment. The denominations of the digital rupee are same as that of currently circulated paper currency and coins. The intermediaries distributing the physical currency are banks but for e-Rupee, it is only the participating banks who will be issuing it through a digital wallet stored in the mobile phone of the user. The e-Rupee can be used for both transactions – Person To Person (P2P) and Person To Merchant (P2M), it can also be used for merchant transactions using QR codes.

CBDC’s Presence

The pilot project of CBDC launch is covering four cities: Mumbai, Delhi, Bengaluru, and Bhubaneswar, and four banks. The customers and merchants, from these select cities, in a Closed User Group (CUG), will be able to use the digital rupee (e₹-R), or e-rupee. The controlled launch of the digital currency is managed by: the State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank. And in the second phase, four more banks, viz., Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank will be added in this pilot, extending to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla. The learning from the first two launches will be added and adapted in the scope with gradual expansion to include more banks, users, and locations as needed.

Goals of Central Bank Digital Currency

The primary goal of CBDCs is to offer financial security, privacy, transferability, simplicity, and accessibility to companies and consumers.

CBDCs may also cut the cost of cross-border transactions, lessen the expense of maintaining a complicated financial system, and offer more affordable choices to those who move money in other ways.

A CBDC also gives a nation’s central bank the tools it needs to carry out monetary policies that promote stability, restrain economic development, and affect inflation. The value of cryptocurrencies fluctuates continuously, and they are volatile.

RBI’s CBDC Vs Crypto and UPI

The main differentiator between CBDC and cryptocurrency is – the CBDC is backed by a central bank (or a sovereign nation), while the cryptocurrency is private money and is not backed by any sovereign entity.

The payment settlement happens instantaneously for all 3, i.e. – CBDC and UPI, as well as Cryptocurrency.

 CBDCs – The Challenges

The risk of data privacy is inherent with any digital product and hence with CBDC too. And as the nature is financial, CBDC is vulnerable to cyber frauds and attacks. So the risk of financial loss or instability is also associated with it.

While cash has a fundamental feature of anonymity. It leaves no trace of transaction and perhaps it is one reason why it is favorable too. Albeit convenience of e-Rupee, the CBDC being digital will have its traces of transaction.

In a nutshell, technology has its pros and cons. CBDC will strengthen the FinTech ecosystem. It will add trust, security, and convenience to digital retail transactions. And will support the lending tech and its collections too in a big way.


pic source: BloomingdalePR

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