Recent technological advancements have resulted in a new wave of financial services and products offered by various private sectors such as mobile payments apps, digital wallets, and digital assets, including cryptocurrency. These technological advancements have brought central banks across the world to examine the significance of money in today’s digital age.
According to the Bureau of Indian Standards (BIS), more than 90 countries are considering the idea of a Central Bank Digital Currency (CBDC). The Union Budget 2022-23 has announced that India will also be launching its digital rupee within the coming fiscal year. Due to the international and local attention, it is vital to know the benefits and costs of the CBDCs.
In theory, there could be a variety of Central Bank Digital Currency (CBDC). However, CBDC is usually considered a digital banknote as a form of digital money issued by a central bank that can use by businesses and individuals to pay. It is crucial to remember that CBDCs will be the responsibility of a central bank, in contrast to current digital payment systems that are the responsibilities of commercial banks.
The various motives behind the issue of a CBDC are mentioned below:
The first reason is the concern that large-scale tech companies like Amazon and Facebook may issue their digital currency to their users on their vast networks, which helps to increase their market power across the world. It could be a danger to the currency of the sovereign currency. The second reason is similar to other instruments in the financial market. The money could eventually evolve into a digital form. It becomes crucial given the declining use of cash and the growing acceptance of digital payment across all countries.
The role of India in the global CBDC debate is highly distinct. Over the past ten years, the payment system and Indian banking situation have drastically changed. It was initiated by establishing NPCI (National Payments Corporation of India). The NPCI is a non-profit company promoted by a large number of private and public sector banks in 2007.
The UPI (Universal Payment Interface) is the major game-changer in the digital transaction field. This UPI gave birth to various platforms such as Paytm, Google Pay, PhonePe, and many more. These digital payments methods are famous across a significant part of India.
Across the globe, most countries do not permit digital transactions that are cheap and low as one rupee. Recently, the United Arab Emirates (UAE) became the third country following Singapore and Singapore for accepting UPI transactions outside India.
Another significant initiative recently launched is the electronic RUPI payment system, which is cashless and contactless. The e-RUPI payment system does not require smartphones and the Internet. Currently, the e-RUPI is a specific purpose. However, it can be adapted to serve other needs. Both e-RUPI and UPI payment systems could effectively address financial inclusion issues and electronic transactions.
The Reserve Bank of India (RBI) recently announced an offline digital payment option up to 200 Rs. per transaction. Such types of transactions will not require extra authentication factors. It clearly shows that India is the leading country in the race for digital payments.
One crucial benefit of issuing a central bank digital currency (CBDC) will enhance the cross-border payment systems. The current system for cross-border payments is mainly based upon the SWIFT platform, which is expensive, time-consuming, and opaque. Interestingly, CBDC in India originates outside of the domestic context.
In the case of the United States, the typical cost of transferring a remittance of money from the United States to other countries is 5.4 % of the national value of the transaction. Also, The Bureau of Indian Standards (BIS) is taking an active role in encouraging countries to believe in the international aspect when they design their CBDCs.
The worldwide dependence of the SWIFT messaging system and US dollar supports cross-border transactions. That has increased the ability of the US to implement sanctions. For some countries across the globe, reducing their dependence on the US dollar and avoiding sanctions are primary reasons that motivate the development of a CBDC.
Now knowing that the US is also considering the possibility of a CBDC, the idea will accelerate the race to define the rules that govern the operation of digital currencies within the financial system worldwide. According to the white paper published by the Fed, the United States will be finalizing the design of CBDC in the second half of the year.
Therefore, India’s decision to introduce a digital rupee is opting. What is essential in determining its effect is the design to be used. A retail CBDC could have the risk of financial disintermediation. Since a digital currency could represent the central bank’s responsibility, it is the top choice for investors who are cautious and could be an asset of choice during times of crisis and could alter the savings-investment plan of the economy.
The design of the CBDC should develop by considering the issues and financial growth in India. It’s essential to ensure the timing is correct and the proper format. In the same way, the interest-bearing CBDC can also impact the current banking system.
ABOUT AUTHOR
Barry is a lover of everything technology and finance (FinTech). Figuring out how the software works and creating content to shed more light on the value it offers users is his favorite pastime. When not evaluating apps or programs, he's busy trying out new healthy recipes, doing yoga, meditating, or taking nature walks with his little one.
