Recently, during a webinar, the deputy governor of Reserve Bank of India T. Rabi Shankar remarked that the RBI is currently working on a phased implementation strategy for its own digital currency, Central Bank Digital Currency (CBDC), and will launch it in the wholesale and retail segments soon. The primary idea for the RBI is to protect consumers from the appalling level of volatility seen in some or many of the virtual currencies that have no sovereign backing. Though the phased rollout of digital currency augurs well for India, it will come with its own challenges.
Digital currencies are gaining more and more traction by the day, and there are countries which have launched, or are going to be launching digital currencies, including Ecuador, Tunisia, Senegal, Sweden, Estonia, China, Russia, Japan, Venezuela, and Israel.
Reports say that 81 countries, representing over 90 per cent of Global GDP, are exploring CBDCs. Fourteen counties have tested pilots, in 16 countries such currencies are in the development phase, and 32 countries in the research phase. Fourteen major economies, including China and South Korea, have tested pilots. China is currently leading the race of CBDCs, and has recently released a report which mentioned $ 5.5 billion worth transactions carried out during the digital Yuan pilot run. China has plans to introduce digital Yuan in the winter Olympics next year. The Bank of England is also pushing a pilot programme for bitcoin in the next few weeks.
However, experts with whom THE WEEK spoke have different views on the subject. Some find the concept revolutionary in India, some find it a positive move, while some others warned that the launch of CBDCs may not be a smooth affair and still requires more clarity in India. There are still a lot of misconceptions about the concept of digital currency in the country.
“The CBDC central bank digital currency should not be mistaken with a cryptocurrency or Bitcoin. A CBDC is a central bank issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset. This guarantee from a central bank reduces the CBDC risk, volatility, and ensures a larger acceptance across the globe. On the other hand, a cryptocurrency is issued by a network and backed by a crypto asset which may or may not have the backing of any monetizable asset or physical asset.
Therefore, the risk is higher and there is more price volatility and lesser acceptance as a money instrument globally, unless the trust factor and investor protection factors change,” explained Sudin Baraokar, Global IT and Innovation Advisor.
According to Baraokar, a CBDC can definitely increase the transmission of money from central banks to commercial banks and end customers much faster than the present system. “Specific use cases, like financial inclusion, can also be covered by CBDC that can benefit millions of citizens who need money and are currently unbanked or banked with limited banking services,” he said.
Experts point out that the move to bring out a CBDC could significantly improve monetary policy development in India. The enhanced surveillance and real-time situational monitoring enabled by the central bank digital currencies can go a long way in stimulating these processes. “RBI’s move to enable CBDC provides all participants a framework to fully realize the potential of digital currency. The central bank’s effort to be at the forefront of digital innovation can help grow an ecosystem similar to UPI that will reduce inefficiencies for the end customer while opening up massive opportunities for entrepreneurs,” remarked Nikhil Kamath the co-founder and chief information officer, True Beacon and Zerodha.
A few experts also feel that CBDC could allow governments to effectively tackle illegal activities, such as payment fraud, giving people a greater sense of security with their money. “Digital fiat currencies create greater barriers to illicit activity, as physical cash can help conceal and transfer funds outside of regulated financial systems. With the growing adoption of CBDCs, payments and transfers will be easier to identify and trace to previous sources, significantly reducing the risk of fraud and money laundering.” observed Raj N., Founder and chairman, Zaggle & Zikzuk.