The evolution of money is interesting, starting with the exchange of goods to 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 account.
Today, the concept of central bank digital currency (CBDC) has received a lot of attention and interest around the world and federal banks are now exploring and evaluating the opportunities of CBDC. CBDC is a digital form of fiat currency issued by a central bank and is equivalent to fiat currency.
A study by the Bank for International Settlements in 2021 found that 86% of central banks around the world were actively pursuing opportunities for CBDCs, 60% were experimenting with related technologies, and 14% were deploying experimental projects. In a recent speech, the RBI Deputy Governor highlighted India’s long-awaited position and the need for a CBDC in India.
As these debates and considerations continue, we present our perspective outlining how retail CBDCs can impact lives. I would like to draw readers’ attention to the fact that the scope of this article has been limited to the retail aspect of CBDC and not wholesale.
First, let’s understand what Retail CBDC is. Retail CBDC serves as a format of digital fiat currency for the general public to use to conduct financial transactions for day-to-day operations. Typically, the CBDC exchange is based on Distributed Ledger Technology (DLT), similar to a government-funded private blockchain network that allows transactions to be tracked anonymously. It also helps to reduce the involvement of private parties, thus preventing any illegal activity, such as money laundering or fraud. The CBDC can be delivered directly to the people by a federal bank.
Alternatively, Retail CBDC can be issued to intermediaries (which can be public/private banks) who then offer the same as fiat currency.
Benefits of CBDC in the Retail Context
1. Direct beneficiary transfer
CBDCs are a great way to ensure that money spent on programs and programs by the government directly reaches beneficiaries and is used only for its intended purpose. The Federal Bank can pay beneficiaries of the pre-arranged CBDC, which can only be authorized for a specific purpose. For example, CBDCs could be issued for LPG grants as a direct transfer of benefits. Such a CBDC can only be accepted at authorized GPL agencies and will otherwise be rejected. LPG agencies may convert this CBDC to a common-use CBDC or fiat currency at any commercial bank, which may have the consent required to change the type of CBDC. These subsidies can also be extended to other sectors such as agriculture, where fertilizer subsidies can be transferred through the CBDC.
2. Cross-border fund transfer
CBDCs can be used for fast cross-border payments. International cooperation between major world economies, including India, could help create the structure and agreements necessary for CBDC transfer and exchange. In such a case, CBDC delivery can take place in real time, reducing the time it takes for the disbursement to be received by the proposed beneficiary. Additionally, the emergence of the CBDC could see SWIFT evolve. As a neutral and independent currency cooperative, with a reach of 11,000 institutions in more than 200 countries, SWIFT is well placed to engage closely in the debate and any future currency developments. 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 vital role in supporting its members as the CBDC begins to transform the landscape.
CBDCs will be used to make payments. CBDC distributed by the RBI and commercial banks will be held in e-wallets by end users. This would enable consumer-to-consumer payments to consumers or a business where an exchange of CBDC between their wallets can take place.
Retail CBDC will allow the creation of wallets directly with RBI, which is unprecedented. This will have a direct impact on consumers & #39; ability to build a history with the RBI and eventually help them obtain loans and access other financial products directly from the Central Bank. Additionally, the CBDC will allow instant loans to MSMEs. As more MSMEs opt for CBDC, banks will be in a better position to build a more accurate borrower risk profile, helping MSMEs with their financial needs. Additionally, in times of crisis or times of uncertainty, the CBDC can be leveraged for Federal Bank stimulus distribution. Additionally, monitoring CBDCs can help MSMEs prove their creditworthiness. However, it would be interesting to see if RBI will go down this path and risk disintermediating traditional banking channels.
5. Smart contracts
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, provides flight delay insurance using smart contracts. So how do they compensate you for flight delays?
The smart contract is linked to the database recording the status of the flight. 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 holds ACME’s money until certain conditions are met. The smart contract is submitted to nodes on EMV (a runtime compiler to run smart contract code) for evaluation. All network nodes running the code should arrive at the same result. This result is recorded on the distributed ledger. If the flight is delayed for more than two hours, the smart contract automatically executes and you are compensated. Smart contracts are immutable; no one can change the agreement.
Its use makes transactions traceable, transparent and irreversible.
The fear of exclusion is the biggest challenge the CBDC has to overcome. In a country like India, where more than half a billion people still use keypad phones, it is important to ensure that CBDC is not relegated to the few with the technological know-how. . Additionally, the success of the CBDC will depend on the inclusion of people from lower socio-economic 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 have to solve problems by innovating, as in the case of offline payments.
The opinions expressed above are those of the author.
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