CBDC reducing dependency on cash
Go digital. This is what the whole world is heading to and India too is taking baby steps. In this year’s budget the Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) will launch a Central Bank Digital Currency (CBDC). It is proposed to introduce digital rupee which is nothing but a digital form of the fiat currency the Indian rupee. It will be exchangeable based on blockchain technology.
The Finance Minister during her speech said that digital currency would boost the economy. For decades, credit cards and in the last few years Paytm and other means of transactions which are digital would now get a further fillip.
The simultaneous shift to digital forms of payments will also bring its own set of benefits. As transactions will go digital, the government will save on the cost of printing currencies. The transactions will be instantaneous and will be accessible in more remote areas.
On the flip side, the state’s strong control over the blockchain network within which the digital currency would operate upon its introduction. Central banks would have greater control over money creation and greater insight into how people spend their money, potentially invading users’ privacy.
Impact of CBDC on payment apps
There are many reasons why countries will need their own CBDC systems. In India, interbank transactions and settlements already take place through the reserves individual banks maintain with the RBI, so there may not be much impact in this arena. However, in the retail segment, a bulk of the transactions still relies on physical cash and increasingly, on digital payment solutions. It is important to recognize that payment solutions such as those from Google, Amazon, Apple, or Paytm and Phonepe are all privately-owned and controlled; as such, their growing popularity does pose a risk to the country’s financial system.
Currently, all payment solutions in India, whether developed and deployed by fintech players, Big Tech or banks, run on the Unified Payments Interface (UPI) infrastructure built and managed by the National Payments Corporation of India (NPCI), which is jointly promoted by the RBI and the Indian Banks Association (IBA).
It is is important to keep in mind that the payment apps owned and managed by fintech and Big Tech companies are not under the direct regulatory supervision of the RBI because they are not licensed banks. A CBDC-based ecosystem will make the regulation of such apps and platforms easier and more effective- thus enabling a higher degree of consumer protection.
Digital rupee is different from bitcoin?
Blockchain technology, by nature, is decentralised, meaning that all its information is stored across a network of computers. This brings increased resilience to the data against errors as well as cyber threats. For cryptocurrencies like Bitcoin, this network is spread globally across the systems of its developers.
Digital Rupee will have a slightly different version of this. Since the currency will be regulated by the RBI, it will not be truly decentralised in nature. Meaning there is, in fact, one entity controlling its issuance and distribution, just the opposite of what decentralised would mean in a true sense.
At this time, it is unclear when and how the government will choose to launch India’s CBDC. But it is fair to say that an entirely new digital currency ecosystem will be needed. It is likely that the RBI will restructure Securities & Exchange Board of India (SEBI). The road ahead will have its own challenges at both the policy and operational levels. The success of CBDC will also depend on how quickly internet access expands across the country and how resistant to hacking and breaches the underlying systems are.
Image credits – Google
BAGAM SAI SHREE RAJ
.BBA I YEAR
