Our Finance Minister Nirmala
Sitharaman has made CBDC as a household term as it has been the latest
buzzword for many of us wondering- What is it and how will it work? For
those, who are unaware of the crypto or blockchain world, the fad CBDC
is Central Bank Digital Currency, which is a government issued digital
currency and is backed by the central bank of the nations. In India's
case it is the Reserve Bank of India (RBI).
Putting it in simpler terms,
a CBDC is the legal tender of a particular country as it is issued by
the central bank but in the digital form. It is an electronic record or
digital token of the official currency issued by the monetary authority
of a nation.
A
survey conducted by Bank of International Settlements (BIS) in 2021
revealed that 86 percent of the central banks were exploring the
potential of CBDCs and about 15 percent of the states are set to launch
their pilot projects.
The CBDC will fulfil the basic functions as a
medium of exchange, unit of account, store of value, and standard of
deferred payment. CBDC is the same as currency issued by a central bank
but takes a different form than paper (or polymer).
Even our Prime
Minister Narendra Modi said that the CBDC launched by RBI will be as
good as India's fiat currency - Indian National Rupee (INR) and will be
exchangeable to the cash at par. It is sovereign currency in an
electronic form and will appear as liability (currency in circulation)
on a central bank’s balance sheet, says the RBI website.
Need of CBDC
CBDC
will be backed by distributed ledger technology (DLT) but will be a
permissioned blockchain which will make it different from other
permissionless crypto assets. The central monetary authority will have
control access to the blockchain. Central banks are facing dwindling
usage of paper currency and now seek to popularize a more acceptable
electronic form of currency. Advanced cash will be more proficient and
will actually avoid the damaging results of private monetary forms.
Advantages of CBDC
CBDC
will be the final payment and eliminate the risk of settlement in the
financial system, particularly the banks. The CBDC will be the actual
store of value and will transfer the value from one entity to another.
It will prompt lower exchange cost and make the progression of cash more
straightforward. CBDCs will move towards continuous exchanges and a
globalized savvy instalment settlement framework. For Instance, Indian
merchants can pay an American exported consistently in advanced dollars
without the need of a delegate.
It
would not even require that the US Federal Reserve system is open for
settlement. Time zone differences would no longer matter in currency
settlements. This transaction would be final as CBDCs are as good as the
fiat currencies.
According
to a note released by State Bank of India (SBI) the CBDC has the
potential to offer benefits in terms of liquidity, scalability,
acceptance, ease of transactions and faster settlement in comparison
with existing forms of money. It can be a pragmatic shift to a cashless
economy in the near future.
The adoption of CBDC will improve and make
it easier for people to use with the supporting infrastructure provided
by the government. It will boost the government's mission to move
towards the digital economy. It can establish an environment created for
interoperability whereby faster real-time remittance occurs.
India vs World in CBDCs
India
is expected to launch CBDC or the digital rupee in the financial year
2022-23 but the government is hinting at it from 2021. The RBI will
analyse and assess the CBDCs scope in retail and wholesale payments, the
underlying technology, use cases, validation mechanism (token based or
amount based), denominations and architecture of issuance.
Among
the global peers, Nigeria is set to launch its digital currency named
Naira. Venezuela is also planning to launch its CBDC, ie, the digital
Bolivar. South Korea is pilot testing digital Yuan. The European Central
Bank (ECB), US, Russia, China, Turkey is also mulling their plans for
the CBDCs.
Kunal Jagdale, Founder, BitsAir Exchange
