How RBI’s CBDC will change the payments ecosystem

The Central Bank Digital Currency (CBDC), currently being explored by the Reserve Bank of India (RBI) for retail and international trade payments, could have a much larger impact on the financial ecosystem, according to industry experts. It will be instrumental in promoting grassroots level financial inclusivity and modernising the banking sector apart from creating a cashless economy.

While many see CBDCs as a legalised replacement of private digital currencies or cryptocurrencies, in reality, CBDCs are just going to be a digital replica of the physical cash in circulation in the country. “RBI is creating a digital version of the fiat currency in circulation. Currently, the only alternative to physical currency is debit cards or credit cards, which are not accessible to all citizens,” Naveen Surya, Chairman, Fintech Conversion Council and Emeritus Chairman, Payments Council of India, told BusinessLine .

Also read: Why CBDC will not end bitcoin’s reign

“CBDC could be used directly through mobile phone. It can use blockchain technology but doesn’t necessarily need to be linked to a bank account to hold it. This will convert your mobile device into a wallet. In short, it will fast-track financial inclusivity while building a cashless economy,” Surya added.

India is in fact late to join the trend. Countries like Russia, Japan and China had started working on the same much earlier. According to a 2021 BIS survey, quoted in the RBI report, 86% of the central banks surveyed are actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. “It took 4-5 years of multiple pilots before China could look into introducing digital currency,” Surya said .

Need for CBDC

“Today though we are doing e-payments and money transfers thinking they happen in real-time, but at some point, this money still has to be physically moved between the banks, known as ‘inter-bank’ settlement. With CBDCs, there won’t be the need for inter-bank settlement, your digital payments will be the final transactions,” Sharan Nair, chief business officer, CoinSwitch told BusinessLine.

Cryptocurrency exchanges lauded the move, saying that a possible widespread usage of digital currency will only boost their business and familiarise the masses with the technology and its varied forms. Though cryptocurrency isn’t necessarily looking to become a currency used for making payments. “Private cryptocurrencies are primarily seen as tradable assets. Though some countries have allowed Bitcoins to be used a mode of payment, NFTs and other cryptocurrencies are mostly assets. They don’t have the characteristics of currency and neither do they want to be,” Surya said.

Financial Transparency

A major use case for CBDCs will likely be in the insurance and lending space and also for managing non-performing assets (NPA). Using digital currencies will enable more transparency and traceability across levels for the financial services sector. The RBI at present is pondering upon the underlying technology on whether it should use distributed ledger or a centralized ledger, and a possibility of using blockchain. “In the case of lending, say if a farmer wants to take a loan to buy fertilizers and farming-related activities, at present, it is difficult of the government to verify how it is used. But with digital currency the government will be able to programme it in a manner that it can be used only for the fertilizers and not a car,” Nair explained.

“In international trade too, for instance, if an importer wants to settle a payment in the US, due to the time zone difference that will delay the transaction and due to change in dollar to rupee value, prices would have changed. CBDC can settle this in real-time without needing further intervention,” he added.

“Challenges of different vendors working with different merchants will subside once CBDC come into play. Merchants would want to use this, as this would eliminate third party payment gateway involvement, bringing down the cost of transaction fees,” Sathvik Vishwanath, Co-founder and CEO, Unocoin told BusinessLine.

Complex process ahead

Converting a part of paper money into digital currencies will surely come with its complexities and confusion. “To implement this the government authorities and the RBI would have to work on digitising the entire currency circulation model. Further, several other fundamental issues and monetary policies will have to accordingly be taken into account, as with CBDC there will be more traceability and transparency of the currency on digital network,” Surya said.

Additionally, blockchain technology in its current state might not be the most efficient way forward.

Vishwanathan said, “It doesn’t look like the RBI is looking to involve any cryptocurrency-related technology like blockchain. It will be more of a centralised wallet service like Paytm. Blockchain is not capable of handling millions of transactions per hour. Currently, bitcoin blockchain supports up to seven transactions per second and then there are some others that let a few thousand transactions per second. For a country like India, blockchain technology won’t be able to manage such an enormous volume of data.”

“Given that it is only the Indian government sponsoring this technology for its citizens which makes it a single-party creator, using blockchain will be as good as creating a regular database,” he added.

Also, increased traceability might introduce new challenges around privacy. “With blockchain, they (government) can get a partial biography of every person using the digital currency and what all he uses it to pay. That will be quite intrusive,” Vishwanathan said.

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