Introduction
On February 1, 2022, India’s Finance Minister Ms. Nirmala Sitharaman announced that India’s Central Bank, the Reserve Bank of India (RBI) will introduce digital currency in FY 2022-23. She said “The introduction of the CBDC will give a big boost to India’s digital economy. The digital currency will also lead to a more efficient and cheaper currency management system”. Following up on the Finance Minister’s announcement, RBI announced the launch of digital currency. The write up below is an attempt to provide clarity on the concept of digital currency.
What Is CBDC?
CBDC is an acronym for Central Bank Digital Currency. As we know, currencies are issued by the Central Bank of every country. Likewise, Central Bank proposes issuing digital currencies along with the conventional format (papers and coins).
We have got accustomed to digital formats in every walk of our lives (photos, videos, music, books, etc.). Similarly, the conventional currencies are slowly giving way to the digital format. CBDC in India is also known as e-rupee (e₹).
Difference Between Cbdc & Digital Payments
Many of us are confused between CBDC and digital payments. We use online payment modes through the internet and using mobile devices and are not able to understand how digital payment is different from CBDC.
Every printed currency note mentions that “I promise to pay the bearer, a sum of xxx rupees”. This is signed by the RBI Governor. Therefore, the RBI Governor gives an undertaking that the piece of paper you hold in your hand is worth say ₹100/-.
Let Us Understand the Concept of Digital Funds Transfer.
Let us assume you wish to transfer ₹100/-, to your brother and both of you are in different cities. You deposit this sum in your account, which is held in a bank, say Axis Bank, Chennai. Your brother might have an account in HDFC Bank, Mumbai. When you transfer funds to him through your mobile device using a payments platform like G-Pay, Bharat Pe, etc., his account is credited with ₹100/-. He can walk into HDFC Bank Mumbai branch and withdraw ₹100/-. Had it been prior to 15 or 20 years, you would have sent a cheque or demand draft for ₹100/- to your brother and he would have deposited the instrument in his bank’s branch in Mumbai. The tedious process of issuing a cheque/DD, sending it across to your brother and him depositing the instrument in his bank and waiting for funds to clear is replaced by payment interfaces in mobile and internet.
Coming back to the example, you have sent ₹100/- to your brother and he withdraws from his bank branch or through an ATM. Now, he has a printed currency in his hand. CBDC (e₹) is an attempt to eliminate the physical currency that he holds in his hand, replacing it with digital currency. Every person/entity is issued a digital wallet, irrespective of whether they have an account with a bank. The wallet is credited with digital currencies. Digital currencies have denominations like ₹5/-, ₹10/-, etc. Imagine you having a physical wallet with 2 notes of ₹100/- and 2 notes of ₹500/- (total ₹1200/-). This is now replaced with a digital format.
CBDC Advantages
- Easy to carry – saves people the hassle of carrying physical currencies, eliminating risks of loss & theft.
- Cheaper to Manage – RBI and Govt are spending significant amount of money in printing and circulating physical cash. In addition, banks spend money in transporting physical cash between branches and automated teller machines (ATMs), as well as on the security provided in safeguarding currencies in branches, cash carrying vehicles and ATMs. CBDC is an opportunity to cut such expenditures and physical labour.
- Settlements – CBDC is divided into two – retail CBDC and wholesale CBDC. While retail CBDC is for individuals, wholesale CBDC is for financial institutions such as banks. Payment settlements between banks and with central bank can take place digitally instead of having to move physical cash.
- Cross border payments – CBDC provides an opportunity to innovate cross border payments in the way the currencies are settled between nations.
Risks
As we’ve always heard, “No risks, no rewards”. Any digital innovation is prone to cyber-attacks. It is a no brainer these days that when we set to buy a computer or a laptop for our personal use, we think of the anti-virus that we’ll install on the device before actually buying the device. When the economy of a country is shifting to digital mode, it is much more than an anti-virus or VPN that must be carefully thought about. In India, we witnessed a massive outage on November 23, 2022, at a premier medical institution which was at the receiving end of a cyber-attack, compromising millions of its patients’ data including that of VVIPs. Unless due care is taken to protect the digital currency from cyber risks, the entire exercise might stand to be compromised. It is not only the digital servers, also the individual wallets need protection.
Presently, in India, there are two types of CBDC(e₹), as mentioned above – individual and wholesale. However, there are many types of entities that are dealt by institutions like trusts, proprietor firms, partnership firms, Hindu undivided families (HUFs), corporates, institutes, etc. The type of wallets RBI issues to every type of customer will be an interesting development.
CBDC is a concern in countries like India where mobile networks are not readily available in every nook and corner of the country. In such cases, there is another parallel concept “Offline CBDC” which the central bank is working on. Details and finer points are still awaited.
Way Forward
RBI proposes to use block chain technology to manage e₹. There are other technologies used by different countries, for example, Bahamas uses DLT (Distributed Ledger Technology). This gives ample opportunities to fintech organizations to provide effective currency solutions to entities and making their lives easier. Presently, four Indian banks have introduced this concept in four cities. Gradually, it is expected that the services will extend to other cities and include more banks. Irrespective of what one’s opinion on technology is, this development is here to stay.
Opportunities for Finacle
At the cusp of every new technology, lies an immense potential to be an early bird, thereby leading to earning the pole position tag of trendsetter. CBDC, in its nascent stages, provides us an opportunity to come up with innovative solutions, in creating and sustaining momentum.
- CENTRAL BANK SOLUTIONS: As per RBI report dated 07-Oct-2022, in July 2022, there were 105 countries, in the process of exploring CBDC. 10 countries have already launched the digital currencies. Finacle is a marquee brand not only in core banking industry, also in digital space and treasury. Based on our study of Central Bank operations, this is an opportunity to provide CBDC handling for nations central banks.
- WHOLESALE, RETAIL CBDC SOLUTIONS: Enhancing the concept of accounts and bookkeeping, along with denomination maintenance, Finacle can provide solutions to maintain wallets for retail and wholesale customers.
- INTERFACE & ALIGNING WITH PAYMENTS: Presently payment solutions are aimed at crediting customer’s accounts. Based on prevailing laws in a country, Finacle can credit wallets instead of accounts. The unique advantage a bank receives due to this concept is that the wallet could belong to a customer who may not have account with the bank, thereby earning commission-based income from non-account holders. Likewise, a bank can send payments on behalf of non-customers by initiating payments. It remains to be seen how central banks devise guidelines for such operations.
