With cryptocurrency gaining popularity and acceptance worldwide, Central banks of various countries are rolling up their sleeves and familiarizing themselves with the national digital currency i.e. Central Bank Digital Currency (CBDC). Russia, Sweden, China, Jamaica, Canada, the US, and the UK are at various stages of introducing National Digital Currency. The Bahamas, Nigeria, and seven countries of the Eastern Caribbean have already launched their central digital currency.
India being the sixth-largest economy in the world is also set to welcome its digital currency in the coming years. A recent announcement was made by RBI to introduce India’s own digital currency by FY 2023. The RBI has proposed to adopt CBDC in a graded manner. The announcement shows India’s determination to become a digital economy by harnessing the benefits of the latest technology.
Difference between Digital currency and Cryptocurrency
Albeit, CBDC is based on a cryptocurrency framework, its regulative nature will give it a new proposition and dimension. Cryptocurrency is a store of value protected by encryption, uncontrollable with the decentralized public ledger, and highly volatile. Whereas a digital currency will be fiat money, regulated by the Central bank of a country, worldwide accepted and has a stable value. It is protected by a password with transaction information remaining with the sender, receiver, and bank.
Opportunities and Obstacles
The notion of digital currency can be an instrumental step to ending the era of paper currency and instantaneously penetrating towards a cashless economy. It is estimated that the size of the informal or shadow economy in India is 53 %. It makes it difficult to account for economic activities and handle illegal and unreported activities. Thus, a shift from paper currency to CBDC is one of the ways to formalize the Indian economy and make it transparent and efficient. Further, it can lead India to reduce crimes.
Using digital money instead of cash geared up in India during COVID time, not just for hygiene reasons but also for swiftness by which digital payment services allow a transaction to occur. True there are many services are existing either by financial institutions or other service providers that enable quick transfer from one account to another account, however, payment requires to jump from one account to another account which may get delayed. Another issue is the reconciliation of ledgers between banks and the central bank, which makes this process a complex one. Whereas the use of ledger technology in CBDC will resolve these issues.
The paper currency is a host of cost and charges which takes a chunk of RBI’s books of accounts. At the same time damaged currency adds to RBI’s cost of currency handling and management. With the use of regulated digital currency, it could be reduced.
CBDC would also potentially bridge global differences, which can be real-time payment and cost-effective. It would be convenient for Indian imports to make payments to other countries exported in their digital currency by eliminating intermediaries and reducing transaction costs. Time zone differences would not matter in currency settlement.
Thus, in comparison with existing money, the CBDC can extend the benefits of liquidity scalability, ease of transaction, acceptance, and faster settlement.
However, emerging economies like India have many challenges in the pathway of the transition. In the era of digitalization, more than 50 % of the Indian population is not equipped with technical and financial literacy. The large size of Indian population still prefers to follow the traditional system. In that case, if the importance of CBDC is not well conveyed and well perceived, it may lead to a low adoption rate. This will hinder the primary objective of RBI policy.
Secondly, the implementation of CBDC requires an outlay of substantial operational cost, which includes the development of logistics, grooming of staff to work in CBDC environment, time to time up-gradation of technology as well as the development of an instant appropriate payment system. Another cost that may get added is related to the elevation of cyber security risk, which requires the development of a full-proof protection system for firewalls.
With the purpose of transitioning India into a cashless and 5 trillion economy, RBI is promptly working to operationalize CBDC in FY 2023. RBI must minutely study the advantages and disadvantages of CBDC and its impact on the traditional financial sector. The graded approach of the Central bank of India to launch digital currency in the next financial year must be in alignment with existing monetary policies and currency structure. The approach must ensure no disruption or minimal shock to the economy.
While more details about CBDC are yet to arise, India is keeping its finger crossed over the consequences and a wide population of India is waiting for it with bated breath.
Author
Dr Dippi Verma
CHRIST(Deemed to be University)
Bangalore
Dr. Dippi Verma is a doctorate in Finance with a rich experience of 18 years. She is a member of a panel of paper setters for many universities and autonomous institutions of Bangalore. Authored a book on Business ethics. She is a Reviewer for Scopus indexed Journal, Chaired many conferences, seminars, and business games, and panel discussions in various colleges and institutions.
Apart from this, she facilitated training and development programs for students and faculty. Organized many workshops, seminars, and events in the institutions Published many research articles in various journals, presented papers, and participated in conferences.
