A Quick Peek into Central Bank Digital Currencies

As per estimates, nearly 100 million people in India own crypto-currencies, which amounts to almost 7.30% of the country’s population.

Currently, cryptocurrencies such as Ethereum and Bitcoin, etc., largely remain unregulated; the Reserve Bank of India recently announced the CBDC program to create a digital legal tender that falls under its ambit and could be regulated and accounted for just like fiat money by the end of 2023.

It’s a digital payment instrument that is a digital replica of the fiat currency of the country and would fall under the direct liability of India’s Central Bank. It could prove to be a game-changer since it has the potential to impact the global financial services industry strongly.

Once implemented and rolled out to the general public, CBDCs could be used by everyone from financial institutions, businesses, and even households to make payments and create savings in a more secure format.

Let’s take a deeper look at the Central Bank Digital Currencies (CBDCs) and their impact on the overall economy.

What are Central Bank Digital Currencies?

Unlike fiat money, CBDC is legal tender in a digital format issued by the RBI as a medium of carrying out business and transactions and can be exchanged with fiat currency.

With the government’s push for embracing digital payments and laying the groundwork for a completely digital economy, coupled with a greater preference among consumers to pay through digital modes post the outbreak, cash usage has witnessed a steady decline across multiple countries.

The CBDC program will help maintain and streamline the working of the Central Bank to ensure that ample legal tender remains flowing through the economy so that people can have continued access to money while maintaining financial inclusivity but in a purely digital format.

Differences Between CBDC and Cryptocurrency

The primary difference between the two is that unlike crypto-currencies that are subject to sudden fluctuations in value as a result of investor sentiment, user preferences, and user experiences; CBDCs will be backed by the Central Bank and will be valued at par with the country’s fiat currency making them a more stable form of digital currency.

Moreover, as opposed to anonymous crypto-currencies, transactions carried out using CBDCs will be completely transparent since it would be a centralized currency and will be issued and regulated as per the Central Bank’s guidelines and notifications released from time to time.

India is not the only country with the ambitions of launching its digital currency as an answer to crypto-currencies. Multiple other countries are experimenting with the idea of developing their own CBDCs. There are close to 100 countries where CBDCs have been planned or are currently underway.

Quick Facts About CBDCs

• A CBDC program is designed on the principles of crypto-currency and enterprise blockchain, but they are not essentially cryptocurrencies as they would be centralized and fall under the ambit of the Central Bank’s guidelines
• The state of Bahamas has already implemented their local CBDC called the ‘Sand Dollar’ that has been in circulation for more than a year now
• Sveriges Riksbank, the Swedish Central Bank, has been working on a proof of concept and further exploring the technology behind CBDC and the policy implications that will have once it rolls out
• The Chinese digital renminbi, known as e-CNY, has shown continued progress with over 100 million users and billions of yuan worth of transactions already carried out using the system
• The International Monetary Fund (IMF) is also involved in helping various countries by offering technical assistance to explore CBDCs and is also actively promoting the exchange of experience that could support the interoperability of CBDCs once multiple countries develop their system and start trading using their respective digital currencies.

Impact of CBDC on the Indian Economy

Implementing CBDC in India will have far-reaching consequences for the Indian economy as it will completely revolutionize the banking sector and open up doors to a completely cashless economy. It may also completely replace physical debit and credit cards as users would be able to carry out transactions through their smartphones.

Moreover, even if the technology does make use of permissioned blockchain technologies such as Hyperledger, CBDCs don’t necessarily need to be linked to bank accounts. They will turn a user’s phone into a wallet, resulting in greater financial inclusivity by empowering that part of the population that still lacks a bank account and is often left out of the financial system.

CBDCs cannot be compared with other forms of digital payments since even though the transactions take physically, the resulting cash has to be moved to bank accounts known as interbank settlements. That won’t be the case once CBDC is implemented, as all transactions done through this method would be considered final.

It would also result in better international trading as time zone differences often result in delayed payments, and since the value of currency keeps changing, it affects the final price that is paid out.

CBDCs would make for instant payments, effectively negating the time difference and any fluctuations in the value of the currency, making international trading much faster and seamless.

Conclusion

In short, if Central Bank Reserve Currencies are properly implemented, it could change the financial system for the better the world over by making transactions more efficient, simple, and faster.

This could usher in a whole new era for global trade, banking, and financial institutions, thus spearheading the world towards higher economic growth in the times to come.