CENTRAL BANK DIGITAL
CURRENCIES (CBDC)
- ECONOMY
News:
CBDCs can make
cross-border payments efficient, says Das
What's
in the news?
●
Reserve Bank of India (RBI) Governor
Shaktikanta Das said notwithstanding the progress made so far, the key
challenges to existing cross-border payments continued to be high cost, low
speed, limited access and insufficient transparency and adoption of the Central
Bank Digital Currencies (CBDCs) can make cross-border payments efficient, he
emphasized.
CBDC:
●
A Central Bank Digital Currency (CBDC), or
national digital currency, is simply the digital form of a country’s fiat
currency.
●
Instead of printing paper currency or
minting coins, the central bank issues electronic tokens. This token value is
backed by the full faith and credit of the government.
Types
of CBDC:
●
Based on the usage and the functions
performed by the digital rupee and considering the different levels of
accessibility, CBDC can be demarcated into two broad categories.
a.
General purpose (retail) (CBDC-R)
b.
Wholesale (CBDC-W).
1.
CBDC - R:
●
Retail CBDC is an electronic version of
cash primarily meant for retail transactions.
●
It will be potentially available for use
by all such as private sector, non-financial consumers and businesses and can
provide access to safe money for payment and settlement as it is a direct
liability of the central bank.
●
However, the RBI has not explained how
e-rupee can be used in merchant transactions in the retail trade.
2.
CBDC - W:
●
Wholesale CBDC is designed for restricted
access to select financial institutions.
●
It has the potential to transform the
settlement systems for financial transactions undertaken by banks in the
government securities (G-Sec) segment, inter-bank market and capital market
more efficiently and securely in terms of operational costs, use of collateral
and liquidity management.
Forms
of CBDC:
●
The central bank says e-rupee, or CBDC,
can be structured as token-based or account-based.
1.
Token-based CBDC:
●
A token-based CBDC would be a bearer
instrument like banknotes, meaning whosoever holds the tokens at a given point
in time would be presumed to own them.
●
In a token-based CBDC, the person
receiving a token will verify that his ownership of the token is genuine.
●
A token-based CBDC is viewed as a
preferred mode for CBDC-R as it would be closer to physical cash.
2.
Account-based CBDC:
●
An account-based system would require
maintenance of record of balances and transactions of all holders of the CBDC
and indicate the ownership of the monetary balances.
●
In this case, an intermediary will verify
the identity of an account holder.
●
This system can be considered for CBDC-W,
the RBI said.
What
is the model for issuance?
●
There are two models for issuance and
management of CBDCs under the RBI’s consideration such as
a.
Direct model (single tier model)
b.
Indirect model (two-tier model).
1.
Direct Model:
In the direct model, the
central bank will be responsible for managing all aspects of the digital rupee
system such as issuance, account-keeping and transaction verification.
2.
Indirect Model:
●
An indirect model would be one where the
central bank and other intermediaries (banks and any other service providers),
each play their respective role.
●
In this model, the central bank will issue
CBDC to consumers indirectly through intermediaries and any claim by consumers
will be managed by the intermediary.
Significance
of CBDC:
1.
Reduce the transaction charges: It would reduce the cost
of currency management while enabling real-time payments without any inter-bank
settlement and involvement of third parties.
2.
Cheap and rapid cross-border transaction: Foreign trade
transactions could be speeded up between countries adopting a CBDC.
3.
Low-cost currency: The cost of printing, transporting and
storing paper currency can be substantially reduced.
4. They could enable a cheaper and more real-time globalisation of
payment systems. It is conceivable for an Indian exporter to be paid on a
real-time basis without any intermediary. The risks of dollar-rupee
transactions, the time zone difference in such transactions would virtually
disappear.
5. The adoption of CBDCs
can also have important implications for
the banking system. CBDCs can cause a reduction in the transaction demand
for bank deposits and will reduce the intra-day liquidity for settlement of
transactions. They could also cause a shift away from bank deposits.
6. CBDC will ensure the financial inclusion which is necessary
for inclusive growth.
7. CBDC will reduce the
attractiveness of private cryptocurrency. Hence, It will protect the people from unviable investments. Because unlike
cryptocurrency, CBDC is legal tender.
8. India’s fairly high currency-to-GDP ratio holds out
another benefit of CBDC as to the extent large cash usage can be replaced by
CBDC.
9. RBI has repeatedly
flagged concerns over money laundering, terror financing, tax evasion, etc with
private cryptocurrencies like Bitcoin, Ether, etc. Introducing its own CBDC has
been seen as a way to bridge the advantages and risks of digital currency.
Challenges
of CBDC:
●
Potential cybersecurity threat.
●
Lack of digital literacy of population.
●
Introduction of digital currency also
creates various associated challenges in
regulation, tracking investment and purchase, taxing individuals, etc.
●
Threat
to Privacy: The digital currency must collect certain
basic information of an individual so that the person can prove that he’s the
holder of that digital currency.
●
RBI should oblige to manage and
responsible for huge data of
transactions of Digital currency.
●
Consequential amendments would also be
required in the coinage act, Foreign Exchange management act, Information
Technology act.
●
Sudden flight of money from a bank under
stress is another point of concern.
WAY
FORWARD:
●
The introduction of CBDC has the potential
to provide significant benefits such as reduced
dependency on cash, higher seigniorage due to lower transaction costs, and
reduced settlement risk.
●
It would possibly lead to a more robust, efficient, trusted, regulated and legal
tender-based payments option.
●
Strengthen our cyber security architecture is the important prerequisite for
introduction of CBDC.
●
There are associated risks such as digital divide, privacy concerns, but
they need to be carefully evaluated against the potential benefits.
●
It would be the RBI’s endeavour, as we
move forward in the direction of India’s CBDC, to take the necessary steps
which would reiterate the leadership position of India in payment systems.
●
The institutional
mechanisms would need to ensure that there is no overlap between different
regulators and chart out a clear course of action in case there is a data
breach of digital currencies.