Everything you want to know about CBDC

Relevance: CBDC, its potential impact, relevant suggestions

Synopsis: The central bank digital currency will neither substitute nor compete with cryptocurrency; it’s just a wallet. An analysis of its inherent problems and a way forward.

Background

• The RBI has been working towards a phased implementation of a central bank digital currency (CBDC) with “little or no disruption”.

About CBDC

• Read here: https://forumias.com/blog/what-a-digital-currency-from-rbi-must-get-right/

CBDC in India

• CBDC is just a wallet or an electronic purse, issued by a central bank.
• Like credit card, internet banking and wallets, the CBDCs will be part of the payment system, supplementing use of cash, it’s not an alternative to cash. There are many such wallets operating in the Indian financial system. The CBDC will be one of them, but with a difference that it will be issued by the nation’s central bank.

Impact of CBDC

• Since it will supplement cash, the cost of printing money, distribution and removing of soiled notes will come down drastically as the use of CBDC grows. And, to that extent, the RBI’s surplus funds, will rise.
• For the masses, the transactions will be easy as they won’t have to carry cash
• It will give a push to financial inclusion. CBDC can be used by many Indians who are still not in the banking fold.
• There is no scope for speculation which drives the value of cryptocurrency.
• Regarding safety, since such a wallet (CBDC) will be issued by the RBI (even though it can be done through designated banks), this will be the most secured transaction in the payments space.

Concerns/Issues 

• Interest payments: Should interest be paid on CBDCs or not? And should the RBI issue the CBDCs directly or through banks? When one keeps money with the banks, they earn interest. If the CBDCs don’t offer interest, however small it is, why will people shift from cash to CBDCs? The more important issue is that if interest is paid and the RBI issues CBDCs, won’t there be a flight of deposits from the banks?
• Threat to financial stability: If the regulator ends up competing with the regulated entities, the banking system may see erosion in deposits, threatening the financial sector’s stability.
• Operational issues: There will be many operational issues for the implementation of CBDC, including the KYC (know your customer) norms and privacy of data.
• Risk of fraud: Another challenge will be the risks of fraud, like any other payment system

Suggestions

The CBDCs can be issued via a distributed ledger, synchronised between the banks and the RBI and not a centralised ledger, held solely by the RBI. This is a decentralised model but if the RBI adopts this, it will not end up competing with banks, and financial sector stability will be preserved.

Terms to know:

•  CBDC