Central Bank Digital Currency (CBDC) | Timeline

In the recent Union Budget speech, the Finance Minister announced that the RBI will issue India’s own digital rupee in financial year 2022-23. The budget announcement was made after consultations with the RBI, and the RBI will decide by when it is ready to launch the digital rupee.

– India’s rushed deadline to issue a digital currency seems to be at least partly a response to the rise in the popularity of cryptocurrencies.

– Another reason for hurry, may be a desire to compete with China’s e-CNY, which by early November had some 140 million individuals signed up for its e-CNY. But China has no national roll-out date, and Alipay and WeChat Pay retain their stranglehold on digital payments.

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RBI Deputy Governor has said that the central bank is “working towards a phased implementation strategy” and will examine the CBDCs in the wholesale and retail segments. 

It is worth mentioning that with the rise in popularity of Cryptocurrencies like Bitcoin, more than 50 countries are looking into the possibility of introducing their own CBDCs.

Hence, the future of globalization is CBDC-based.

Digital Rupee: Advantages and Challenges – Explained, pointwise – 3rd Feb 22

A Central Bank Digital Currency (CBDC), or national digital currency, is the digital form of a country’s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the Government.

CBDC is just a wallet or an electronic purse, issued by a central bank. There are many such wallets operating in the Indian financial system. The CBDC will be one of them, but with a difference that it will be issued by the nation’s central bank.

CBDC will be based on blockchain technology and in the Indian context, it will be regulated by the RBI.

The digital rupee could be exchanged for cash and will open new opportunities in the fintech sector.

Note: The Union Budget 2022-23 has used the term Virtual Digital Assets” (VDAs) for all digital assets being transacted on the blockchain, such as cryptos, non-fungible tokens (NFTs), or any other virtual asset.

“RBI shouldn’t rush the launch of India’s official digital rupee” – Live mint – 9th Feb 22

USA: The US Fed is seeking the public’s views on whether to provide an official tender to compete against private stablecoins.

Europe: A digital euro is in a 24-month investigation. If all goes well, the European Central Bank may offer it by 2025. Japan may delay a call to 2026.

Digital Rupee: Advantages and Challenges – Explained, pointwise – 3rd Feb 22

1) Sweden is conducting real-world trials of their digital currency (Krona);
2) The Bahamas has already issued their digital currency “Sand Dollar” to all citizens;
3) In October 2021, Nigeria became the latest country to introduce a digital currency, e-Naira.
4) China started a trial run of their digital currency e-RMB amid pandemic. They plan to implement pan-China in 2022. This is the first national digital currency operated by a major economy.

Countries like Japan, Singapore are currently examining the various facets of such a transition. A few days ago, the US Federal Reserve also released a report outlining the costs and benefits of issuing a central bank-backed digital dollar.

The merits of an RBI digital currency far outweigh risks – Live mint – 13th Aug 21

Helps in becoming more globalized: First, becoming more globalized in terms of international trade and investment are critical to India’s national interests.

Shifting from SWIFT: The current international payments system based on SWIFT is costly in terms of both time and money. So, within no time the international trade, investment and even remittances will look to shift to multi-country CBDC networks. In order to remain globally competitive under these circumstances, India will need to have a CBDC.

Helps in domestic digitalization: An Indian CBDC can also help domestic digitalization. Current efforts at financial inclusion have seen very limited participation by private-sector banks, with the bulk of the burden being placed on public sector banks at considerable loss to them. Since the for-profit NUE (New Umbrella Entity) mechanism is also bank-account-based, it might strengthen the divide. This will make inclusive digitalization a challenging project. CBDCs may provide an alternative to the NUE (New Umbrella Entities) by working outside the banking sector, like through the postal system.

Further, it will help India to slowly move towards a cashless economy

“RBI shouldn’t rush the launch of India’s official digital rupee” – Live mint – 9th Feb 22
Transactions conducted with CBDCs may not be visible to payment apps, and fintech firms may lose access to some data being mined for cheap loans to those who don’t have collateral.

Digital Rupee: Advantages and Challenges – Explained, pointwise – 3rd Feb 22

  • The design of the currency with regard to how it will be issued, the degree of anonymity it will have, the kind of technology that is to be used, etc., needs to be sorted out.
  • CBDC would need an entirely new centralized payment system. This system has to be linked to electronic wallets that reside on prepaid cards, smartphones, or other electronic devices.
  • Digital money will be programmable money. Hence, the government has to come out with suitable products and services using the digital rupee, such as smart contracts.
  • Challenges to the entire banking system: The impact of the digital rupee on the banking system is not clearly understood, e.g., if CBDCs are indeed efficient vehicles for retail savers, this could adversely affect bank deposits. Hence, there might be an impact on the role of banks in credit creation, RBI’s monetary policy, etc.
  • Threat to financial stability: If the RBI offered interest rates on the digital rupee, then it will directly compete with banks. If the regulator ends up competing with the regulated entities, the banking system may see erosion in deposits, threatening the financial sector’s stability.
  • No incentive to switch to digital rupee for user: From a user’s standpoint, there is no real incentive to switch to a CBDC as a growing proportion of retail transactions are already done digitally or by using UPI-based fast payment systems.
  • Potential cybersecurity threat: India is already facing many cyber security threats. With the advent of digital currency, cyberattacks might increase and threaten digital theft, like the Mt Gox bankruptcy case. 
  • End of privacy: The digital currency must collect certain basic information of an individual so that the person can prove that he’s the holder of that digital currency. This basic information can be sensitive ones such as the person’s identity, fingerprints etc. Further, CBDCs will leave a digital trail even with the phone turned off. For instance, trails such as paying for food, fare and lodging.
  • Operational issues: There will be many operational issues for the implementation of CBDC, including the KYC (know your customer) norms and privacy of data.

Watch out for an official central bank digital rupee on its way in”Livemint – 13th Jan 22 

India has at least 500 million people with no access to a smartphone (Statistica reports the use of 845 million phones in 2021). Large numbers have neither an Aadhaar nor PAN card, or even if they do, are not in the habit of using phones except for making calls. Many of our senior citizens have already been robbed by online scamsters

Moreover, a CBDC may lead to failure, decline, or stagnation of the entire financial system. Payment banks will need to close down, as savers will have to maintain accounts with RBI anyway. The UPI system would be redundant. Even commercial banks will see people move money out of savings deposits and probably opt for term deposits at higher rates. ATMs will have to shut down, for sure.

The other major challenge for our central bank will be technology disruptions. Hackers would be a threat, technical failures at banks will become a routine.

“RBI shouldn’t rush the launch of India’s official digital rupee” – Live mint – 9th Feb 22

A CBDC could eliminate the need for an expensive network of correspondent banks to settle cross-border payments. For Indians working abroad, sending money home will become simpler and cheaper.

As researcher Bhargavi Zaveri observes, depositors at 21 Indian lenders have been restricted from withdrawing their funds due to bank distress in the last few years. A CBDC will mitigate the risk of losses that Indian depositors face when dealing with commercial banks.

Digital Rupee: Advantages and Challenges – Explained, pointwise – 3rd Feb 22

Central bank digital currency or the digital rupee will make online payments more secure and risk-free and boost the digital economy in the years to come. It will also lead to ease in the development of a global digital payment system.

Further, introducing the digital rupee will revolutionise the fintech sector by creating new opportunities and lessen the burden in handling, printing, logistics management of cash.

It will prevent counterfeiting of currency and a boost to the war on black money and corruption.

Will accelerate financial inclusion, lower costs for financial transactions, especially in the case of cross-border transactions, the creation of another instrument in the monetary policy arsenal of central banks.

Commercial banks sometimes fail, and depositors lose a big chunk of their money despite the deposit guarantee scheme, but when the money is parked with the central bank there is no risk of default.

Reducing systemic risk: There are about 3,000 privately issued cryptocurrencies in the world. According to IMF, the key reason for considering national digital currency is to counter the growth of private forms of digital money.

Most cryptocurrency exchanges are asking people to invest and trade in cryptos without providing basic information about the product and the inherent risks. There is a possibility of these companies going bankrupt without any protection. But the digital rupee has government backing in case of any financial crisis.

Reduce volatility: The national digital currency will be regulated by the RBI. So, there will be less volatility compared to other digital currencies.

Negative interest rate: In tough times, a Central Bank might want people to spend money, hence the concept of negative interest rates. But, presently it can’t do so as people will simply withdraw their money from the banks. CBDCs will solve this problem. A negative interest rate could be easily mandated on CBDCs kept in the wallets.

Complement blockchain-led decentralised finance: All crypto assets’ final returns will be in sovereign currency, and therefore the digital rupee will aid the virtual digital asset (VDA) markets by bridging the gap between fiat money and decentralised finance.

“RBI shouldn’t rush the launch of India’s official digital rupee” – Live mint – 9th Feb 22

Besides, RBI must do its homework. The technology, blockchain or otherwise, will need to balance the often-conflicting goals of speed, scalability, auditability, security and privacy, something the Fed is trying to do as part of its Project Hamilton.

Given India’s vast digital divide, a protocol for offline use has also to be worked out.

Digital Rupee: Advantages and Challenges – Explained, pointwise – 3rd Feb 22

The Government should work towards an interoperable system between the virtual digital asset and the digital rupee. It will unleash opportunities for not only those working or wanting to work in the decentralised finance space (VDAs), but also for traditional finance industry exponents.Creation of adequate cybersecurity methods: Before the introduction of National Digital currency, the Government has to create certain important things, such as, training of the law enforcement agencies, creating a policy of basic information assessed while issuing, verifying someone’s digital currency.

The RBI needs to create a regulatory sandbox, with limited participants and pre-specified uses, before launching its own digital currency. Only then can the rupee hold its own against other currencies.

Preserving the financial sector stability: The digital rupee can be issued via a distributed ledger, synchronised between the banks and the RBI and not a centralised ledger, held solely by the RBI. This decentralised model will not end up in competition between RBI and other banks.

Though the introduction of a digital rupee provides various advantages for the government, the government has to create necessary safeguards before rolling it out.

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