Central Bank Digital Currency (CBDC) is increasingly being referred to as the ‘future of money,’ which is also evident from the fact that 87 countries representing 90% of the global GDP are currently exploring digital currencies. China was the first major economy to create its own digital currency in April 2021 and the Chinese Central Bank has recently launched digital Yuan wallets for Android and iOS aiming towards an overall domestic use of the CBDC.
India has also announced that a digital rupee will be introduced by its Central Bank i.e. the Reserve Bank of India (RBI) in the coming financial year (April 2022 to March 2023). The Indian Finance Minister, in her speech in the Parliament, emphasized that CBDC will give a ‘boost to digital economy’ and will also ‘lead to a more efficient and cheaper currency management system’ and, therefore, proposed to introduce a digital rupee using ‘blockchain and other technologies.’ Accordingly, the Finance Bill, 2022 was introduced which, inter alia, proposes to insert a clause (aiv) in Section 2 of the Reserve Bank of India Act, 1934. The said clause increases the ambit of the term “bank note” to include notes in digital form. Though the details as to the architecture, functionality and underlying technology of Indian CBDC are not yet known, this new clause suggests that it would mirror the rupee in a digital form and can be exchanged for fiat currency i.e. bank notes which are in physical form.
India witnessed an exponential growth in the adoption of digital payments during the last few years and recorded 40 billion transactions worth more than a quadrillion rupees in 2021. CBDC offers many additional benefits which are not supported by the existing payment architectures/solutions. Firstly, the settlements in CBDC will take place instantly which will, for all practical purposes, render any issues relating to settlement risks to the counterparty banks wholly redundant. Cross-border settlements in CBDC will take place seamlessly irrespective of any time-zone difference, provided both the countries have their CBDCs. The introduction of CBDCs also envisages settlement of transactions in the Central Bank’s ledger directly which will not require the involvement of multiple banks and will reduce transaction cost. Secondly, it will also save substantial amounts which are currently spent in printing, transportation and distribution of fiat currency. Thirdly, CBDC can help in automating tax collection and can also be a valuable tool in distributing subsidies, stimulus and other government support directly to the wallets of the citizen.
The benefits and usability of CBDCs, however, will largely depend on the specific features and model adopted by the RBI. CBDC may be designed for retail or wholesale or for any other specific usage; it may be distributed by the Central Bank directly or through the banks as in the case of fiat currency, and it may use different underlying technologies like blockchain or existing financial technology. Even though the announcement of the introduction of CBDC has already been made by the Finance Minister in the Parliament, the RBI has refused to reveal any timeline or other details including the technology which will be used in RBI’s CBDC. RBI’s Executive Director, Mr. T Rabi Shankar, has stated that the ‘technology choices are open’ and RBI’s CBDC may not necessarily be on the blockchain. Thus, India’s CBDC is still a ‘work in progress’ with very limited details available in the public domain.