Central Bank Digital Currency (CBDC): Pilot launching
The CBDC may be a good start but the Government should move slowly for the retail segment as there is a very vast illiteracy in our country and almost 65 per cent rural population does not have adequate Internet facilities. — Dr. Dhanpat Ram Agarwal
The present era is digital era and a large part of the economic activities are digital. In other words we are moving towards a digital economy where a large number of the business transactions take place through internet enabled computer system or through mobile phones. Digital economy today account for about 15.5 per cent of the global economy and the digitalization is growing very rapidly. It has a direct linkage with the e-commerce and is thus creating more challenges for the small shop owners and the households. The Digital Economy Report 2021 issued by UNCTAD speaks about a divide between the developed and the developing countries as the income gap is increasing amongst nations on the basis of the availability of digital infrastructure or the ICT. The medium of exchange for the commercial transactions for the payments is also done digitally but through banking channels which are backed by the traditional tangible currencies.
However there is a shift in the mind set for shifting to digital currencies and large number of countries are contemplating to develop and adopt official digital currency which will be regulated through their Central Banking system. Almost 19 of the G-20 countries are on the verge of launching their digital currencies and China is one amongst them. In the meanwhile India has taken the lead and has become the first country in the world when Reserve Bank of India has launched the pilot digital currency on1st November 2022 known as Central Bank Digital Currency (CBDC).
In order to understand the nature and nuances of CBDC, let us first understand the basic meaning of a digital currency. A digital currency is a form of currency which is available only in digital or electronic form. It is different from crypto currencies which are unregulated and generally issued by private agencies and has no legal recognition and is full of risk and volatility. Thus it can be said that all crypto currencies are digital but all digital currencies are not crypto. Thus it should be very clear in our mind that the CBDC is not crypto currency and is a legal tender issued by the Central Bank or RBI in a digital form.
In the Union Budget for 2022-23, the Hon’ble Finance Minister Smt Nirmala Sitharaman had made an announcement about introduction of digital currency and said, “Introduction of a central bank digital currency will give a big boost to the digital economy. Digital rupee to be issued using Block chain and other technologies by the RBI starting 2022-23.”
Thus CBDC is not a surprise. The Government of India had decided in principle to issue digital currency and it has done it with a beginning and limited to participation by only few banks on wholesale segment only. RBI has said that “Use of e -W is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.” It has further clarified that the use for this pilot is settlement of secondary market transactions in government securities. CBDC will help to enhance the digital economy by making currency management more efficient and less expensive. It is part of the Fintec Eco system. The existing UPI (Unified Payments Interface) a consumer payment system is already world class but it is supported by tangible currency not digital currency though digital enabled. Digital currency will also enhance financial inclusion at village level and will help fast transactions and increase our GDP with a multiplier effect.
The Reserve Bank of India had issued a concept note on CBDC on 7th October 2022 and has proposed to issue two versions of Digital Rupee — general purpose or retail (CBDC-R) and wholesale (CBDC-W). Retail CBDC can be used by all including the private sector, non-financial consumers, and businesses. The CBDC in the wholesale segment will be referred to as “e -W” and will be an additional option to the currently available forms of money. RBI has allowed nine banks including SBI and HDFC in the wholesale segment on pilot basis and will be gradually extended to retail sector which will be started soon. RBI has said that “The first pilot in Digital Rupee - Retail segment (e -R) is planned for launch within a month in select locations in closed user groups comprising customers and merchants,” It is a sovereign currency and holds the trust, safety, liquidity, settlement finality and integrity of RBI. The features of CBDC are similar to the existing currency and the liability for the same is not of the commercial bank but of the RBI. It is a legal tender which means every Citizen is bound to accept the same and is fully convertible against commercial bank money and cash. The CBDC will be fully covered by the monetary policy of RBI, and the total quantity of money supply will remain same with simply change in the nomenclature in the Balance Sheet of RBI as a liability in cash currency and in digital currency.
The digital currency will eliminate the counterfeiting and fake currency in the market and will also bring more transparency in the financial system by curbing the illegitimate transactions. However it has the danger of data security. Some countries are ready with the technology for the digital currency but are still weighing the pros and cons. Japan has planned to launch it in 2026 and China is yet to announce its e-Yuan. The CBDC may be a good start but the Government should move slowly for the retail segment as there is a very vast illiteracy in our country and almost 65 per cent rural population does not have adequate Internet facilities. CBDC may be about 1 to 5 per cent penetration into our money supplyand both types of currencies physical and digital will remain in operation in hybrid manner for at least a decade.
CA Dr. Dhanpat Ram Agarwal, National Co-Convener, Swadeshi Jagaran Manch
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