Navigating Digital Currency : India’s CBDC Journey and Global Developments
Central Bank Digital Currencies (CBDCs) have been a trending topic for a few years, promising to revolutionize finance. As we step into 2024, India gears up for the next chapter of its CBDC development, aligning with a global surge in exploration.
India’s CBDC Journey:
The Reserve Bank of India (RBI) announced its CBDC i:e Digital Rupee aspiration in 2020 and launched the pilot programs in late 2022. As per the concept note, RBI defines CBDC as the legal tender issued by a central bank in a digital form. It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency, and shall be accepted as a medium of payment, legal tender, and a safe store of value. CBDCs would appear as a liability on a central bank’s balance sheet.
India’s CBDCs will be issued in 2 forms
- Retail (CBDC-R) intended for general-purpose use by the private sector, non-financial consumers, and businesses.
- Wholesale (CBDC-W) intended for restricted use by financial institutions to improve the efficiency of interbank payment or securities settlement.
CBDC-W pilot was launched in Nov 2022 with the use case being limited to the settlement of secondary market transactions in government securities whereas CBDC-R pilot was launched in Dec 2022 within a closed user group (CUG) comprising participating customers and merchants. Eight banks were identified by RBI for the retail pilot in a phased manner, the first phase included the State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank and the next phase included Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank. The current CBDC-R pilot included person-to-person and person-to-merchant transactions through a digital wallet.
In February 2024, RBI also announced the enablement of additional use cases of programmability and offline transactions. Programmability will enforce the usage of the digital rupee for its intended purpose. As cleared by RBI, this will not impact its fungibility and once it is used for its intended purpose, it can be further used as any other digital rupee unit. Fungibility, in the context of money, means all money are the same i:e one 100 rupee note is the same as any other 100 rupee note (or five 20 rupee notes or ten 10 rupee notes) and can be used to purchase the same products or service. Enabling offline transactions will push forward financial inclusion and allow people to transact in areas with poor or limited internet connectivity.
Motivations and Considerations:
Motivations behind CBDC implementation vary for different central banks is aligned with national goals and priorities, yet a common thread among them is to provide its citizens with a risk-free digital currency, ensuring convenience and financial stability.
Apart from that, certain critical considerations will also be significant for successful implementation. Some of them are listed below
- Integration with Existing Financial Ecosystem: A cornerstone for mass adoption lies in seamlessly integrating the digital rupee with India’s current financial ecosystem. This will provide a smooth and convenient experience for users and businesses alike.
- Cross-Network Compatibility: Compatibility with CBDC networks from different countries is imperative to enable cross-border settlements, which will enhance the digital rupee’s versatility and utility on an international scale.
- Addressing Offline Double Spending Concerns: A crucial challenge arises in offline transactions which carries the risk of double spending i.e. the same digital rupee could be spent multiple times as transactions are not updated in the CBDC ledger, which is offline. Developing robust technical solutions and business rules is essential to mitigate this concern effectively.
- Comprehensive Design, Technology, and Policy Considerations: The success of the digital rupee hinges on a meticulous approach to design, technology, and policy. From the architecture of the CBDC to the regulatory framework surrounding its usage, a comprehensive strategy must be devised to ensure a secure, efficient, and user-friendly implementation.
Global Perspective :
As of February 2024, based on a global snapshot by cbdctracker.org, over 170 countries are engaged in some form of CBDC exploration.
China’s digital yuan is gaining considerable traction in terms of adoption among citizens and businesses alike. While it provides distinct features such as regulatory compliances and central bank backing, how it coexists and integrates with other payment platforms such as Alipay and WeChat is to be seen.
Russia is looking at the digital ruble as an alternative to circumvent sanctions and financial restrictions — especially after it invaded Ukraine. As per statement by the Bank of Russia, citizens and businesses should be able to use the digital ruble “at their own request” starting in 2025.
Issuance of CBDC is reported to be delayed in Europe and North America. European Central Bank was to announce if it would launch a digital euro in Oct 2023, but now it has pivoted to a 2-year “preparation phase” from Nov 2023.
Sweden, Denmark, Switzerland, and Canada have no plans to implement CBDC in the near future, the UK has released a consultation response with the proposed approach and agenda without any confirmation if it will adopt a digital currency. The US is in the research state as well, with no commitment for adoption so far but it is witnessing aggressive opposition with claims that digital currency will be used by the government for financial surveillance over its citizens.
IMF’s Guiding Hand :
In the dynamic world of CBDC development, central banks globally grapple with diverse motivations and have to craft their unique definition of success. They are also looking at the IMF to be the compass to provide strategic guidance in this chaotic landscape. In November 2023, the IMF released the CBDC virtual handbook, which is intended to serve as a collaborative resource for central banks to explore, enhance, and understand various facets of CBDC implementations. This handbook covers various process and policy chapters such as the 5P methodologies for CBDC project management, Decision frameworks and policy consideration for CBDC exploration, and many more.
Encouraging collaboration, the IMF’s initiative seeks to bring together central banks into a shared learning experience. By fostering an environment where different banks can highlight their insights, challenges, and best practices, the handbook aims to be a guiding compass and contribute to the collective wisdom surrounding CBDCs.
In conclusion, CBDC is still in its infancy and nations embarking on this digital currency journey, including India, must navigate uncharted waters. While the economic and geo-political implications could be unprecedented, the journey is one of continuous evolution. Central banks play a pivotal role in navigating this digital revolution and seeking success through shared insights, careful implementation, and collaborative efforts will be key.
