CBDC: Is India Ready?

CBDC: Is India Ready?

With more than 6000 crypto currencies in use across the world and a rising investor interest, digital currencies have become too big to be ignored.
All major central banks acknowledge the rise of this parallel monetary system and is working to be a part of it.
India too announced the expected launch of its own digital currency this fiscal. After 30% tax, ED summons to crypto exchanges, RBI is going all in after the cryptocurrency arena trying to regulate it. Is India ready for its own digital currency?

Push from the government

Finance Minister Nirmala Sitaraman had quoted in her Budget speech that the central bank would launch the CBDC in the financial year 2022-23. The Reserve Bank of India, which opposes the private digital currency and its trading in the country, is looking forward to launching its own digital currency but centralized.

RBI is all set to launch CBDC for wholesale businesses with no scope of anonymity by its users. The retail segments, however, will be allotted CBDCs only after examining their usage among wholesale businesses. Here we’ve assembled everything about CBDCs and how it’s going to be adopted.

So what is this CBDC all about?

CBDC is the electronic form of country’s official currency issued by the central bank. Like cryptocurrencies, they are also based on the blockchain framework. The key difference however will be that they are not private but have a sovereign backing i.e. backed by the government. It will be transacted through digital wallets built on the blockchain network.

CBDCs will enjoy similar status as that of fiat currencies, and will be accepted worldwide as a stable currency and a medium of exchange but regulated by Central Bank. A user can transact both domestically and internationally with the help of CBDCs without any third party or a bank as an intermediary. So in a way, it’s just a fiat currency masked in digital format. Is it being introduced just to mimic cryptos or it actually has any use case? Well, here’s the WHY behind the CBDC launch.

Why do we need CBDC?

Just as the Government is manifesting a digital economy in the upcoming years, launching its own digital currency can be an instrumental step in ending the paper currency slowly and steadily. Here are few reasons that make it clear that indeed there was a need for digital currency in India.

1. Transparent transactions: Informal and shadow economy in India accounts for 53% of the total transactions which includes illegal and unreported activities. Hence, CBDCs can formalize such transactions which can further reduce crime and malicious activities.

2. Ease of transaction: COVID geared up the cashless exchange for hygiene and swift payment purposes. CBDCs can leverage such practices of the citizens by providing a more efficient and fast transaction medium for digital payments.

3. Wide Acceptance: CBDCs can conveniently bridge the gap in global settlements with real-time payment options which are cost-effective instead of intermediary fees and transaction costs.

4. Faster Settlement: Online bank-to-bank transactions demands reconciliation of ledgers between banks and central bank making it a complex system, whereas, ledger technology can resolve this leading to faster settlements.

All these improvisations but for whom? The country where more than 50% of the population is education deprived and living below means, how will these CBDCs be adopted? That brings us to the hindrances that stand in between the CBDC adoption and regulation.

Is India really ready for CBDC adoption?

The marginal population living on wages who are not equipped with financial literacy will remain all alien to this system. Also, the CBDC adoption will demand technical expertise, operational costs including logistics development, staff training and education for working in CBDC environment, and timely technological advancement for spreading the CBDC awareness among the masses.

But the rural and unregulated economy following traditional systems deprived of basic banking functions will observe friction while dealing with such digital currencies. In such a friction-led environment, chances are that CBDCs might not be welcomed or well perceived as it was intended. If so, then it may lead to lower adoption of CBDCs and hinder their development in the country. Thus, to reduce this, RBI needs to fill this gap to smoothen the CBDC adoption in the country. With wide adoption, it attracts cyber threat attacks and cyber security risks while transacting digitally. Catering for its protection will add on to the costs of developing of the firewall protection system to safeguard the system from potential threats.

The Bottom Line:

Transitioning into a 5 trillion cashless economy would be a landmark for a developing country like India but it’ll also accompany the obstacles and uncertainties with it. RBI is already flagging concerns over money laundering, terror financing, and cyber threats with current digital payment systems. But with the whole economy transitioning digitally, the RBI will need to minutely anticipate its consequence on the macroeconomic level as well as on the marginalized traditional economy. And since it’s adopting the graded approach by enabling wholesale usage first, it shall gradually expand to other sectors by amending the rules to ensure no disruption to the end users and minimal shock to the economy.

Move to a digital economy is a daunting task for central banks and is bound to be fraught with hiccups. But, it is also a necessary step to support the evolution of our society and monetary system.