Beyond Cash and Cards: Reimagining Money in the Digital Age with CBDCs
CBDC Digital

Beyond Cash and Cards: Reimagining Money in the Digital Age with CBDCs

By Abhishek Rungta February 23, 2024 - 25 views

What is the future of money in an increasingly digital age? This is one question that may have come across your mind, particularly if you’re a stakeholder or involved in any aspect of the financial industry in India or even worldwide. While on the subject, it is pertinent to mention that CBDC (Central Bank Digital Currencies) can play a crucial role in the future. Learning more about it will help, if you’re looking at a futuristic point of view as to what could ultimately take place.

Knowing More about CBDC

CBDC (Central Bank Digital Currencies) is a digital/electronic form of money which can be used by enterprises and individuals for not just making payments, but also for storing value. This is central bank digital finance represented through the national unit of currency. It will indicate legal financial tender with the central bank’s liability. This makes CBDCs similar to actual or physical currencies that are circulated throughout the world. They are thus not as vulnerable towards market volatility in comparison to other digital currencies.

Hence, it can be summed up by stating that a CBDC indicates traditional yet digital money which is governed and issued by the central bank of the country. It is influenced by the monetary policy framework of the country, inclusive of value and supply, along with trade surplus and other factors. It will be functioning on the basis of a digital ledger and may/may not use distributed ledger technology (DLT) or blockchain. It is vastly different from cryptocurrencies which are under the governance of autonomous and distributed groups and is not entirely market-influenced. It is also not the same as electronic cash in a digital wallet or card with a claim against intermediaries, such as commercial banks.

How CBDCs Stack Up In The Future

CBDC (Central Bank Digital Currencies) will evolve swiftly in the near future, enabling central banks to implement it for larger benefits. Some of the aspects that require more discussion include how they can fully swap coins and notes along with their privacy/anonymity levels, in addition to availability and accessibility. Their ability to bear interest should also be discussed in this regard.

What the RBI Feels

When it comes to CBDCs, they are now being increasingly focused on by the RBI (Reserve Bank of India). The Union Minister of Finance had announced that a digital currency would be launched by the RBI as part of her Budget speech in 2021-22. The Government ultimately unveiled the digital rupee- e₹ which was a CBDC controlled and operated by the RBI as a digital counterpart of the fiat currency in India. A pilot project came into being for the retail and wholesale categories within a group of selected banks and users.

The RBI has envisioned CBDCs as digital versions of actual currency, which will be similarly exchangeable as physical currency and obtain acceptance as a payment medium. It will be legal tender while storing value safely. India has already adopted digital payment infrastructure swiftly owing to the UPI (Unified Payments Interface). CBDCs will streamline payments and take things forward by widening the possibilities in this case, particularly for industries such as e-commerce. It will just be like cash-based transactions, leading to instant settlements. It can scale up the efficiency levels of payment systems.

For the wholesale banking sector, cross-border payments are an area which necessitates rapid transformation. World Bank reports indicate how India is the highest recipient of global remittances, having got a whopping $87 billion in 2021. The biggest source was the United States, contributing close to 20% of the same. This increased by 12% in 2022, touching $100 billion. Remittance costs are hence vital for those staying abroad. Wholesale CBDCs can address better cross-border payments or even serve the domestic market which is largely untapped till date. CBDCs should contribute towards lowering the costs of managing currencies while promoting higher financial inclusiveness across the country. There will be more innovative and efficient payment systems and avoid the risks linked to virtual and private currencies.

Key Features of CBDCs

A CBDC (central bank digital currencies) may have the following features, depending on the approach taken by the apex bank and other authorities.

  • DLT (Distributed Ledger Technology) – CBDCs are fully digital, although their technological mechanisms are unique. DLT may serve its purpose in terms of enabling record storage by banks and financial institutions. DLT will enable multiple copies of transaction histories, each of them managed and stored by separate financial entities and mostly managed by the central bank instead of a centralized database with all records. This will be a permissioned blockchain setup with only select entities being allowed to access or modify the blockchain. Central entities will control access and what stakeholders can do with the same.
  • Central Control- Governments and central banks will look at retaining higher control over CBDCs with DLT. The central bank will control money supply and participation of financial entities in distributed ledger management.
  • Better Efficiency and Cost-Reductions- CBDCs may ultimately enable lower money transfer costs. The concept will be more connected financial enterprises, enabling smoother money movement throughout the financial system.
  • Payment Tracking- CBDCs will enable easier tracking for all transactions. Government policies will influence the level and framework of tracking in this case, with a view towards enabling higher privacy for all citizens.

Currently, most countries may perceive CBDCs as a supplementary money option and not something that will fully replace actual currency. Multiple countries have already unveiled their CBDCs, including Nigeria, Jamaica, and the Bahamas. Several more countries (114 approximately) are already experimenting with/exploring the concept of CBDCs as per a survey conducted by the Atlantic Council. China has already launched its e-CNY pilot in the year 2021 and its digital Yuan already offers representation for 0.13% of reserves and cash with its central bank.

President Joe Biden has also issued an executive order in March last year for swiftly evaluating the risks and advantages of CBDCs in the USA. India is already testing its retail and wholesale CBDCs, while Russia has been testing payments in digital rubles from April last year. Japan has launched its pilot around the same time, while the United Arab Emirates (UAE) is anticipating the completion of its digital dirham project in the first phase by 2024. Australia is also testing its eAUD with several partners like DigiCash, MasterCard, and the Australian Bond Exchange. While a tiny chunk of USA lawmakers have voiced concerns about centralization of currency being a curb on further innovation in the financial space, on the whole, there is a global consensus towards testing and launching digital currencies or CBDCs for widespread benefits.


Which countries are exploring CBDCs and what are their approaches?

Several countries are already exploring CBDCs, including China, which has successfully covered 0.13% of its reserves and cash with digital Yuan and India, which is testing CBDCs in both the wholesale and retail segments. The USA is looking at an evaluation while Australia is testing its eAUD with select partners.

What safeguards are in place to protect CBDCs against cyber threats and hacking attempts?

There are several safeguards that are in place for protecting CBDCs from hacking attempts and cyber threats. These include encryption, rapid response frameworks, multi-factor authentication, and regular security audits.

Will CBDCs replace physical cash entirely, and what is the future of physical currency in a digital age?

CBDCs may not fully replace physical cash as of yet. However, there are possibilities of it becoming a preferred option amongst the global public in terms of payments and cross-border transactions. Physical currency usage is expected to keep declining in the digital age, which will further accelerate the adoption of CBDCs.

Can CBDCs coexist with other forms of digital and traditional currencies?

CBDCs may coexist with other forms of traditional and digital currencies without any hassles. This is because it will be a digital counterpart of traditional or physical currency with full central bank control and management. This will not hinder the growth and expansion of other private virtual currencies.

How do central banks strike a balance between promoting innovation with CBDCs and managing potential risks, such as cyber threats or systemic disruptions?

Central banks can look at scaling up security measures for CBDCs in terms of encryption, data privacy, and other aspects. Being centralized and under full control of the apex bank like physical currency, the security risks should be lower in comparison to private digital currencies. At the same time, there should be a sustained effort towards innovation in terms of more payment and transaction possibilities with lower costs and higher efficiency levels.

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