CBDC

The Need for CBDC in An Era of UPI and Cash

fsstiprod — Wed, 09 Oct 2024 09:54:57 +0000

The Need for CBDC in An Era of UPI and Cash fsstiprod Wed, 10/09/2024 - 15:24

When it comes to the Central Bank Digital Currency (CBDC) in India, one question that often gets asked is why India needs a CBDC when it already has UPI and of course, cash.

Most people believe that UPI already solves the problems that typically come with cash. And to a large extent, that is true. While cash has been the primary medium of exchange for ages, it does carry a big amount of security risk. Cash is tangible in nature and widely accepted, but carrying cash is risky and susceptible to theft. Another reason why cash works is because it is accepted everywhere; there is literally no person or business that will refuse cash. But cash transactions can be time-consuming and inefficient. Cash also offers a high degree of privacy, but it can also be counterfeited and used for unlawful activities.

When UPI came onto the scene, it was touted to be the next big thing in payments, and it has lived up to that billing. UPI’s popularity and usage sees new highs every month, which is largely because of its speed, ease-of-use and interoperability. UPI transactions are instantaneous, it doesn’t require anything more than your smartphone and mobile internet, and it works across banks and apps. UPI also comes with a bunch of additional features. But the but here is that UPI is dependent on the internet and smartphone penetration in India is still low. UPI also puts the user at the risk of cyberattacks, frauds and scams, which we all know are becoming highly sophisticated.

So, as we’ve seen, both cash and UPI have their positives but also come with their own set of negatives. Can CBDC come in here and become the one answer to all of these problems?

The case for CBDC in India

India’s CBDC – the e-Rupee or e₹ - is said to be a game-changer for the financial and payments ecosystem in many ways. One of the biggest benefits of the e₹ is its ability to improve financial inclusion by catering to the unbanked population in rural parts of the country. The transaction costs of CBDC are said to be lower as compared to UPI, which would help low-income people to access financial services more easily.

CBDC also brings in better transparency and efficiency. When it comes to UPI transactions, many people don’t realise that the settlements are not instant, especially for person-to-merchant (P2M) transactions. Merchants usually receive settlements in batches throughout the day. e₹ transactions, on the other hand, are almost instant and therefore, lower the settlement timeframes in a big way. CBDC, like UPI, also allows transactions to be tracked and audited, which helps improve transparency and reduce fraud.

When it comes to hackers, one advantage that CBDC holds over UPI is that the financial loss can be less. When a UPI account is hacked, the perpetrators gain access to the UPI user’s entire bank account. However, in case of e₹, only the CBDC wallet and the money in it at that time will be vulnerable. This means that if a CBDC account is hacked, the hackers can withdraw money only from the wallet, not from the linked bank account.

If the e₹ can potentially reach a larger base of our population, it can let the RBI carry out more focused monetary policies to enhance the state of the economy. CBDC can also help lower the dependency on conventional banking systems. For cross-border payments as well, CBDC can facilitate faster and cheaper transactions along with lower costs and delays. This can potentially give a lift to the country’s commerce and investments by facilitating smooth worldwide transactions.

Difficulties and food for thought

It is true without doubt that the e-Rupee offers several advantages to the Indian ecosystem. But getting CBDC up and running to match the reach of cash and UPI will not be without difficulties.

Developing and presenting a strong CBDC infrastructure calls for large technological and financial commitments. So far, we’ve seen that the Reserve Bank of India (RBI) is fully invested in making both the retail and wholesale segments of the CBDC a success. This will have to be continued by them for the foreseeable future, till CBDC becomes mainstream.

One way in which CBDC is similar to UPI is that the transactions can be monitored, which will raise concerns over privacy and issues around surveillance. The regulatory bodies have to ensure that these concerns are addressed adequately and also that strong policies are put into place to make sure CBDC isn’t at risk of cyberattacks and frauds, the like of which we’re seeing with UPI these days.

Overall, including CBDC into India’s current payment system that is dominated by cash and UPI will need careful planning and coordination. Though there are obstacles to be solved, the possible advantages–better financial inclusion, more efficiency, and more openness–make this development exciting.

The Advantages CBDC Presents for the Indian Economy

fsstiprod — Thu, 25 Jul 2024 10:12:59 +0000

The Advantages CBDC Presents for the Indian Economy fsstiprod Thu, 07/25/2024 - 15:42

The Central Bank Digital Currency (CBDC) puts India, a nation undergoing a digital revolution, to the point where it has more than shown its preparedness to welcome the future of money. The country is in a great position to seize the significant advantages this ground-breaking invention has to provide. After all, India, from being an early adopter of digital payment systems, is now a shining example in the use of real-time payments.

Understanding CBDC

One must first fully grasp the concept of CBDC before appreciating its advantages. Unlike Bitcoin and other cryptocurrencies, CBDC is a digital form of fiat money produced and under control by the central bank of a country. Apart from having the same legal tender value as physical cash, the central bank bears direct accountability for the country’s CBDC as well.

In the case of India, this would be the e-Rupee or e₹. India’s CBDC was piloted in December 2022, in both the retail and wholesale segments. RBI’s goal of 1 million e₹ transactions a day was met around a year later. In this previous article, we have explained the concept of CBDC in detail. Now let’s dig further into the benefits of CBDC.

Potential benefits of CBDC for India

Equity in monetary concerns

By providing banking services to millions of people who either lack bank accounts or have insufficient ones, CBDC has the power to change financial inclusion in India. Those who live far-off can participate in the official economy by using such a digital wallet.

Generally speaking, digital transactions cost less than those based on cash. This helps to save costs. This also means that people and companies, especially those situated in rural areas, could be brought into the digital economy at notably lesser costs.

Public openness and efficiency

Unlike conventional payment methods, which usually include middlemen and clearance processes, CBDC transactions can be handled practically much faster. Furthermore, being a digital currency, CBDC lowers the possibility of fake notes, so guaranteeing confidence and security in the payment system.

One of the ways that more openness can help in the battle against tax evasion, money laundering, and other forms of financial crimes is by means of traceability and audit of CBDC transactions.

Expansion of digital economy

By accelerating the acceptance of digital payment systems, CBDC could help to create a cashless economy and assist economic growth by means of this process. It gives the central bank a direct avenue to provide monetary stimulus to the economy.

A payment system like CBDC can further help to streamline international trade and remittances, therefore reducing costs and improving efficiency.

Robust financial situation

By means of an alternative payment method, CBDC can help reduce the systematic hazards related to the existence of the banking system.

A strong CBDC infrastructure has the capacity to raise the resilience of the payment system, thereby ensuring that financial services will keep running nonstop.

For the shared good

Within the framework of disaster relief, CBDC could be a very useful tool since it allows the quick and efficient distribution of support to affected areas.

By allowing direct government benefit delivery to beneficiaries, CBDC helps lower leakages and improve targeting. This can have a huge bearing on social welfare initiatives.

Considerations and challenges

Although CBDC has great potential, it is important to address the possible issues and worries that might develop notwithstanding its great advantages. Among them are:

In terms of cybersecurity, protecting the CBDC system against cyberattacks is absolutely vital. Protecting user information and preventing financial losses calls for strict security policies
The use of CBDC could affect the banking system and the transmission of monetary policy, therefore influencing financial stability. Tight planning and control are necessary to lower the possibility of negative consequences
Ensuring that everyone has equitable access to CBDC will help avoid the digital gap from becoming even more evident. The government must provide digital literacy and infrastructure in underdeveloped areas

Last thoughts

All said and done, the e-Rupee has the potential to improve the quality of life o millions of Indians and drive economic growth. If India takes the time to carefully address the issues and strategically capitalize on the possibilities, it might lead internationally in the acceptance and implementation of CBDC as well.

Cooperation among the government, central bank, financial institutions, and technology providers is of great relevance since the country is about to start this exciting journey, all of which guarantees a CBDC ecosystem that is successful and friendly to all.

Explained: What is e-Rupee and the Role of CBDC in India’s Digital Economy

fsstiprod — Wed, 03 Jul 2024 11:09:47 +0000

Explained: What is e-Rupee and the Role of CBDC in India’s Digital Economy fsstiprod Wed, 07/03/2024 - 16:39

2023 was a significant year for India’s digital rupee called e-Rupee (e₹). Pilot tests of the e-Rupee began in December 2022, and by the end of March 2023, RBI records showed that ₹1616.39 crore worth of the digital rupee was already in use. RBI's first goal was for one million e-Rupee transactions to be processed every day by the end of 2023, a goal which was achieved as planned.

The pilot of India's CBDC was launched in December 2022 in both the retail and whole segments, with small groups of customers and merchants. The idea behind working with e₹ is to boost the development of the digital economy while also lowering the costs of handling cash. Creating a digital currency also helps make a payment system that works well and helps more people get access to money, eventually enhancing financial inclusion. But what does CBDC really mean? Let's find out.

What is CBDC

CBDC or Central Bank Digital Currency is the digital form of the national currency of a nation. The country's central bank issues and oversees CBDC in the same way it does with the country’s physical currency.

Digital currencies or CBDCs, such as e-Rupee, are more efficient and safer than traditional currencies, which people think of as stable and reliable. CBDCs combine the best of both worlds, which could completely change the way money works and allow for new ways to pay, make policies, and include every citizen from urban as well as rural areas into the financial system.

The origin of CBDC

While CBDC is a fairly new concept for most of us, Nobel Prize winner James Tobin was the first person to talk about it in 1987. He suggested to store digital currency as a way for people to pay for things that was both safe and easy to use.

The idea has been around for decades, but it wasn't until recently that central banks around the world began to take it seriously. This is because fewer and fewer people use cash. Furthermore, improvements in technology have made more research and studies into CBDC possible. At the moment, more than 100 CBDCs are in the research and development stage. Nigeria and The Bahamas were the first two nations to go fully live with their respective CBDCs.

The benefits of CBDC

One of the major reasons nations around the world are looking into CBDCs is to deal with the rise in popularity and use of private cryptocurrencies. These are decentralized digital currencies that are not controlled or backed by a central authority. They are not part of the regular banking system, so central banks can't regulate them. Cryptocurrencies cause many threats and dangers that CBDCs can help fight. Central banks may be able to take back control of a country's monetary policies with the help of CBDCs.

One more good thing about CBDCs is that they can be made in two different types: retail and wholesale. Wholesale CBDC can be used only by financial institutions and is mostly used for deals between banks and other wholesale transactions. Retail CBDC, on the other hand, is open to everyone and can be used for everyday payments where cash or digital payment methods are usually used.

Besides these benefits, CBDC could completely change the way money works by making deals faster and cheaper, allowing more people to use money, and making transactions transparent.

The challenges of CBDC

A well-thought-out plan, clear rules, and general support are all important for CBDC to work. To find out what CBDC can do, there needs to be a lot of study, pilot projects, and teamwork between central banks, governments, and technology companies.

Another big worry about CBDCs is their impact on privacy and safety. Also, it is very important to find a balance between protecting users' privacy and stopping illegal activities like money laundering and funding for terrorism. For CBDC

systems to work well and be effective, we also need to think about technical issues like scalability, interoperability, and resilience.

Our take on CBDC

In India, the e-Rupee will be a big part of making our digital economy flourish further. In the past few years, digital payments have grown by leaps and bounds, thanks in large part to UPI. Our CBDC will only help this progress go even further.

When it comes to retail CBDC, we think that India will use it extensively, just like they use digital payment methods now. As more people join the digital economy, a well-established CBDC can lower the costs of operations, make it easier for people to do small amounts of banking, and improve financial inclusion.