Currently being explored by the Reserve Bank of India (RBI) for retail and international trade payments, Central bank digital currency (CBDC) could have a much larger impact on the financial ecosystem and will be instrumental in promoting grassroots level financial inclusivity and modernising the banking sector apart from creating a cashless economy, according to industry experts.
While many see CBDCs as a legalised replacement of private digital currencies or cryptocurrencies, in reality, CBDCs are just going to be a digital replica of the physical cash in circulation in the country. "RBI is creating a digital version of the fiat currency in circulation. Currently, the only alternative to physical currency is debit cards or credit cards,”- Naveen Surya, Chairman, Finch Conversion Council and Emeritus Chairman, Payments Council of India.
India is in fact a late entrant to join the trend. Countries like Russia, Japan and China had started working on the same much earlier. According to a 2021 BIS survey, quoted in the RBI report, 86 per cent of the central banks surveyed are actively researching the potential for CBDCs, 60 per cent were experimenting with the technology and 14 per cent were deploying pilot projects. "It took 4-5 years of multiple pilots before China could look into introducing digital currency," Surya said.
NEED FOR CBDC
"Today we are doing e-payments and money transfers, thinking they happen in real time, but at some point, this money still has to be physic ally moved between the banks, known as 'inter-bank' settlement. With CBDCs, there won't be the need for inter bank settlement, your digital payments will be the final transactions," - Sharan Nair, chief business officer, Coin Switch
Cryptocurrency exchanges lauded the move, saying that a possible widespread usage of digital currency will only boost their business and familiarise the masses with the technology. Though crypto currency isn't necessarily looking to become a currency used for making payments. "Private crypto currencies are primarily seen as tradable assets. Though some countries have allowed Bitcoins to be used a mode of payment, NFTS and other cryptocurrencies are mostly assets. They don't have the characteristics of currency and neither do they want to be," Surya said.
FINANCIAL TRANSPARENCY
A major use case for CBDCS will likely be in the insurance and lending space and also for managing Non-performing Assets (NPA). Using digital currencies will enable more transparency and traceability across levels processes for the financial services sector.
"In the case of lending, say if a farmer wants to take a loan to buy fertilisers and farming related activities, at present, it is difficult of the government to verify how it is used. But with digital currency the government will be able to programme it in a manner that it can be used only for the fertilisers and not a car," Nair explained.
"Challenges of different vendors working with different merchants will subside once CBDC come into play. Merchants would want to use this, as this would eliminate third party payment gateway involvement, bringing down cost of transaction fees,”- Sathvik Vishwanath, Co. founder and CEO, Unocoin
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