5 reasons why Retail CBDC is good for India

The evolution of money is interesting, starting with the exchange of goods for coins and paper money, and now digital currency. However, the basic characteristics of money are always the same. It is used to store assets, can be used as an exchange, and serves as a unit of accounting.

Today, the concept of central bank digital currency (CBDC) has gained a lot of attention and interest around the world and federal banks are now exploring and evaluating CBDC opportunities. CBDC is a digital form of fiat money issued by a central bank and is equivalent to fiat money.

A Bank for International Settlements study in 2021 revealed that 86% of central banks worldwide were actively researching opportunities for CBDCs, 60% were experimenting with related technologies, and 14% were deploying experimental projects. In a recent speech, the Deputy Governor of RBI highlighted India’s long-awaited position and the need for CBDC in India.

As these debates and considerations continue, we present our point of view outlining how retail CBDC can impact lives. I would like to point out to readers that the scope of this article has been limited to the retail aspect of CBDC only and not wholesale.

First, let’s understand what CBDC retail is CBDC retail serves as a digital fiat currency format intended for the general public and to be used to make financial transactions for day-to-day operations. Typically, CBDC exchange is based on Distributed Ledger Technology (DLT), similar to a government-funded private blockchain network that helps track transactions anonymously. It also helps to reduce the involvement of individuals, thus preventing any illegal activity such as money laundering or fraud. CBDC can be delivered directly to people by a Federal Bank.

Alternatively, Retail CBDC can be issued to intermediaries (which can be public/private banks) who offer the same as fiat money.

CBDC Benefits in the Retail Context

1. Direct transfer from the beneficiary
CBDCs are a great way to ensure that money spent on programs and schemes by the government goes directly to recipients and is only used for its intended purpose. The Federal Bank can pay the recipients of the pre-established CBDC, which can only be allowed for a specific purpose. For example, CBDCs may be issued for LPG concessions in the form of a Direct Transfer of Benefits. Such CBDC can only be accepted at authorized LPG agencies, otherwise it will be rejected. LPG agencies may convert this CBDC into a common purpose CBDC or fiat money for any commercial bank, which may have the necessary consent to modify the CBDC type. These subsidies can also be extended to other sectors, such as agriculture, where fertilizer subsidies can be transferred through the CBDC.

2. Cross-border remittance
CBDCs can be used for fast international payments. International cooperation between major world economies, including India, can help create the necessary framework and arrangements for CBDC transfer and exchange. In this case, CBDC delivery can occur in real time, reducing the time required for the disbursement to be received by the proposed beneficiary. Furthermore, the emergence of CBDC could see SWIFT itself evolving. As a neutral and currency-agnostic cooperative with reach to 11,000 institutions in over 200 countries, SWIFT is well positioned to be closely involved in the debate and any future evolution of money. SWIFT is already orchestrating an experiment involving a cross-border transaction between a traditional wholesale RTGS payment system and a DLT-based CBDC platform. As an integral part of the financial services infrastructure, SWIFT will play a critical role in supporting its members as the CBDC begins to transform the landscape.

3. Payments
CBDCs will be used to make payments. CBDC distributed by RBI and commercial banks will be held in e-wallets by end users. This would allow inter-consumer payments to consumers or to a business where a CBDC exchange between their wallets could take place.

4. Loan
Retail CBDC will allow the creation of portfolios directly with RBI, which is unprecedented. This will have a direct impact on consumers’ ability to build a track record with the RBI and eventually help them obtain loans and access other financial products directly from the Central Bank. In addition, the CBDC will allow instant loans to MSMEs. As more MSMEs opt for CBDC, banks will be in a better position to draw a more accurate risk profile of the borrower, helping MSMEs with their financial needs. In addition, during crises or uncertain times, the CBDC can be leveraged for stimulus distribution by the Federal Bank. Furthermore, CBDC tracking can help MSMEs to prove their credibility. However, it would be worth seeing if RBI will go that route and risk disintermediating legacy banking channels.

5. Smart Contracts
Let’s consider a real-life scenario where smart contracts can be used effectively. Suppose you are at the airport and your flight is delayed. ACME, an insurance company, offers flight delay insurance using smart contracts. So how do they compensate you if your flight is delayed?

The smart contract is linked to the database recording flight status. The smart contract is created based on terms and conditions. The condition set for the insurance policy is a delay of two hours or more. Based on the code, the smart contract withholds money from ACME until a certain condition is met. The smart contract is sent to nodes in the EMV (a runtime compiler to run the smart contract code) for evaluation. All nodes on the network that run the code should arrive at the same result. This result is recorded in the distributed ledger. If the flight is delayed by more than two hours, the smart contract will run automatically and you will be compensated. Smart contracts are immutable; no one can change the agreement.

Using it makes transactions traceable, transparent and irreversible.

To complete

The fear of exclusion is the biggest challenge that CBDC has to overcome. In a country like India, where more than half a billion people still use numeric keypad phones, it is important to ensure that CBDC is not relegated to the technologically savvy few. Furthermore, the success of the CBDC will depend on the inclusion of people from lower socioeconomic groups in the country. If we want the CBDC ecosystem to be sustainable, we need to address a variety of issues and make the CBDC work as a tool for inclusion. We need to solve problems by innovating, as in the case of offline payments.

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Disclaimer

The opinions expressed above are those of the author himself.



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