[Answered] Highlight the benefits and risks of issuing a CBDC in India, with reference to the RBI’s concept note.

Recently the Reserve Bank of India (RBI) released a ‘Concept Note’ on central bank digital currency (CBDC) for India.  Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central bank. CBDC is sovereign currency issued by Central Banks in alignment with their monetary policy. It must be accepted as a medium of payment, legal tender, and a safe store of value by all citizens, enterprises, and government agencies.

Benefits of issuing a CBDC:

• It provides reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency, and innovation in payments system.
• The use of offline feature in CBDC would also be beneficial in remote locations and offer availability and resilience benefits when electrical power or mobile network is not available.
• CBDCs will provide the benefits of virtual currencies while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies.
• It will provide reduced dependency on cash, and reduced settlement risk. It could provide safety and liquidity to the settlement system, boosting innovation in cross-border payments space.
• CBDC will provide entrepreneurs a platform to create new products and services.
• The introduction of CBDC, would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.

Associated Risks:

• Frauds: In countries with lower financial literacy levels, the increase in digital payment related frauds may also spread to CBDCs.
• Cyber security risks: Public blockchains preserve transparency but that does not provide cyber security by itself. The centralised systems will have the same cyber security concerns as is applicable to the existing Fast Payment Systems (FPS).
• Privacy concerns: given that the central bank could potentially end up handling an enormous amount of data regarding user transactions.
• Disintermediating banks: If sufficiently large and broad-based, the shift to CBDC can impinge upon the bank’s ability to plough back funds into credit intermediation.
• If e-cash becomes popular and the Reserve Bank of India (RBI) places no limit on the amount that can be stored in mobile wallets, weaker banks may struggle to retain low-cost deposits.
  • Faster obsolescence of technology could pose a threat to the CBDC ecosystem calling for higher costs of upgradation.

CBDC is aimed to complement, rather than replace, current forms of money. The Digital Rupee (e₹) system will further bolster India’s digital economy, make the monetary and payment systems more efficient and contribute to furthering financial inclusion.