7 Central Bank Digital Currency – Opportunities and Obstacles for India

Central Bank Digital Currency – Opportunities and Obstacles for India

By: Rahul Sinha (St. Xavier’s University, Kolkata)

Abstract:

In the recent times, cryptography and blockchain technologies have enabled various fields and provided certain prospects for progress. Central Bank Digital Currency is a concept which lies on the foundation built by cryptography and blockchains. Various nations like Bahamas, China, Singapore and Switzerland have already established their hold on Central Bank Digital Currencies and have been recognized as one of the first movers in their concerned spaces. In this article, we will try to figure out whether CBDC’s are the next “Big change” in the global financial, governance or the technological space and while doing so, our aim is to understand the basics of CBDC’s, analyse the global best practices and find out the probable use cases which India can implement in order gain global recognition.

Introduction:

Central Bank Digital Currencies will not only help in advancing digitalisation of payments but retail, wholesale and Cross-border CBDC’s will expand choices and diversify payment option for the users. It will enable non-banking public to use the money generated by central bank while making payments in a digital ecosystem. Since the decline of cash has already been accelerated by the global pandemic, Retail CBDC’s have a great scope to develop even during these tough times. These digital currencies offer public, the choice of making a retail payment outside of the banking system, which is very similar to a cash transaction that doesn’t require an intermediate bank.

Retail CBDC’s:

These are distributed by the banking system and held in electronic wallets in form of digital cash/currencies. This mode of payment enables consumer to consumer, Consumer to Business and Business to Consumer transactions.

Retail CBDC’s not just facilitates instant settlements but also reduces the risk of inherent batch clearing of retail payments. To issue Retail CBDC’s the Central Bank can also partner with telecom operators to directly roll out digital currencies for public use.

Private operators can undoubtedly deliver near universal payment services. Retail CBDC’s Amplifies financial inclusion and prevents terrorism funding by encrypting transactions, restricting use for certain purposes and enabling traceability.

Wholesale CBDC’s:

It provides a token-based platform to offer settlement conditions. The CBDC’s can replace RTGS for peer to peer, easy, diversified, transparent system of payments. This change will help to overcome network barriers and control of access. It will nullify the time consumption of payment technologies and provide atomic delivery with respect to transactions.

Factors like diversification of national payments, resilience, security in large value payments, reduction of counter-party credit along with liquidity risk are a few key features among many.

How can CBDC’s benefit International Payments?

Remittances are the amounts (earnings) sent by foreign workers to an individual in their home country, it not only is a key factor in a nations development index but also helps to maintain a stable foreign reserve.

As we know the global average remittance costs are 7% which is more than twice the target set by United Nations - Sustainable Development Goals.

Use of CBDC’s and blockchain technologies will help in the following ways:

● It will reduce the processing of payments. ● Eliminates all transaction costs. ● No money will be trapped in pre-funded nostro accounts.

CBDC Global Tracker:

The Map in Fig 1 portrays the global movement involving CBDC’s, it highlights the nations who have been involved in Research, Conducting Pilot Surveys, Development or have already launched their CBDC.

The Map also highlights the nations who have remained inactive after notable progress or have cancelled their projects due to government regulations or any other specific reason.

Best Global Practices – A comprehensive analysis.

The Crypto space has witnessed the entry of various nations in the past few years. While Bahamas have already started issuing their Sand Dollars, China is performing various pilot projects to facilitate their research, development by conducting real life tracing and tracking of DCEP’s before launching it in their country. In order to keep this article short, yet informative, these are the two best model which are required to be observed and analyzed.

1. Bahamas: Bahamian Sand Dollar (Status: Already Launched)

The Bahamian Sand Dollar is a success story which motivates us to delve deeper in the space of central bank backed digital currency. The aim of the Bahamian Sand Dollar was to promote inclusive access to regulated payments and other financial services for “Unbanked” and “Underbanked” communities of the country.

The introduction of CBDC’s helped the service providers to reduce service delivery costs and increase transactional efficiency.

2. China: DCEP / Digital RMB (Status: Pilot)

The recent developments by the Chinese economic and technological entities have gained attention all around the world. The official CBDC of China is called DCEP/Digital RMB. It is a structure built on blockchain and cryptographic technology. The digital currencies will be directly issued by People’s Bank of China (Central Bank) with a goal to increase the circulation of RMB and reshape the current cross border payment system.

The prospective issuance and distribution process will involve two tiers:

● The first tier will witness transactions between PBOC and Intermediaries like financial institutions (State owned banks) and Non-financial institutions (Corporate enterprises like Alibaba, Tencent and Union Pay). In this tier, the PBOC will issue the

DCEP’s to the intermediaries. ● The second tier will include the above-mentioned intermediaries and participants of the retail marker (companies and citizens). In this tier, the intermediaries who had received the DCEP from the central bank will distribute it through the market.

The DCEP’s would be transferred through electronic wallets rather than bank accounts.

Figure SEQ Figure \* ARABIC 2: Issuance, Distribution and Circulation Structure of DCEP.

Figure SEQ Figure \* ARABIC 3: Probable use cases of CBDC's for India

The Chinese DCEP is in its final stage of pilot surveys where test runs have been made by issuing DCEP to a sample of customers who were selected by a lottery. The customers were asked to spend the digital currencies in specific retail outlets. It has also been noticed that “offline transactions” are facilitated by the DCEP. The pilot has been a successful attempt and the digital currencies will be rolled out very soon.

Conclusion: Analysis of Opportunities and Obstacles for India -

While it has been noticed that the Reserve Bank of India has not favored cryptocurrency issuance and trading within the domestic borders, it has also been noticed how the RBI has shown interest in forming its own Digital currency using the fundamentals of blockchain technologies and cryptography. India can implement their CBDC to facilitate various transactions, figure 3 will help to deliver a better understanding.

With a key agenda of our central power to make India “Digital” it is the correct time when the movement must be started. We have witnessed how COVID-19 has changed our lives, digital transactions through apps like Paytm or Google Pay have already transformed into a necessity. In this situation, If India plans to go digital with respect to its official currency, it will surely capture the global headlines and become an ideal example for other countries.

The main challenges which can slowdown India’s CBDC onboarding is spreading awareness and convincing the public to go cashless. The policies of the government will play a key role in facilitating the onboarding process. Various corporate institutions have also expressed their key interest in figuring out the best use cases for India, this is a glorious opportunity as all the stakeholders have come up together to initiate this process. Keeping all this in mind, it can be predicted that the glorious days are not far away.