Green Bonds, digital currency hold promise

Context:  The Budget had two major announcements pertaining to the issuance of sovereign green bonds and a central bank digital currency. These two launches will be a joint effort between the government and the RBI.

What are Sovereign Green Bonds?

It will be a part of the government’s borrowing program. The government undertakes borrowing to finance the excess expenditure incurred, on both capital and revenue accounts. In the case of sovereign green bonds, the money borrowed has to be used for projects which are ESG (environment, social and governance) compliant.

Pricing of bonds: This can prove to be tricky. They can either be priced at higher rates as  ESG compliant companies have to make special investments that will push up costs. Or they can be priced at lower rates to aid ESG implementation. They can also be issued as tax-free bonds, open to the public, which can incentivise participation of retail investors.

What is Central Bank Digital Currency (CBDC)?

This is the central bank’s version of digital currency. It is different from cryptocurrency as cryptos are an investment option, unlike a CBDC which is a substitute for currency.

Certain fundamental questions have to be addressed before launching CBDC:

1. Is a CBDC going to replace currency at some point in the future? There are still several sections of people in India not familiar with this technology.
2. If it is going to coexist with currency, how different will it be for the public from the digital payments that are being made today?
3. Any issuance of CBDC on a voluntary basis also raises a question on the security of the owner’s information. There is a requirement of confidentiality.
4. What will be the future of the banking system as CBDC catches on? Issues related to the future ATMs, bank tellers, bank deposits etc. need to be addressed.
5. The issue of security as any financial system that runs on technology can be hacked. It has to be foolproof and power failure resistant.

Way forward: In future green bonds can be replicated by the state governments, if successful. The CBDC can also help in taking advantage of new technologies like blockchain. However, it might be useful to keep in mind the issues flagged above.

Source: This post is created based on the article “Green Bonds, digital currency hold promise” published in Indian Express on 24^th March 2022.