Central Bank Digital Currency
Given the rise of digital currency the previous year, it is to be noted that it has spiked the interests of many for investments, even though it might put them on the wrong side of the law and at odds with the government. Given such a spike in the public’s interest, it is quite right to see that the interest of the regulators to regulate the unpredictable market has also spiked. This has effectively led the world’s central bankers to begin discussions on the idea of central bank digital currency.
On the other hand, countries like El Salvador and Miami have shown their burgeoning interest in the crypto that has led even the International Monetary Fund and its managing director to talk openly about the pros and cons of the contentious digital currency.
This conversation should also take into consideration the fact that cash is hugely being used less and less in various other countries. At the same time, digital payment systems in various countries will essentially give CBDC tough competition. Various payments apps like PayPal, Venmo in the West; Alipay and WeChat in China, and Paytm in India can offer attractive alternatives to the central bank’s services and initiatives.
But here it is to be noted that only commercial banks have the access to central banks’ balance sheets. This also effectively includes that central banks’ reserves are already held as digital currencies, this is why central banks will be more efficient and cost-effective than any other payments platform in mediating interbank payments and lending transactions.
Given that no other individuals or corporations enjoy such unhindered access, they too must rely on licensed commercial banks to process their own transactions. Thus central banks have an upper hand in processing payments and transactions and thus a more reliable digital banking system.
Talking along similar lines, RBI too recently indicated the fact that it too is considering a phased introduction of a central bank digital currency (CBDC). Given that the unregulated black market is booming under the vigilance of the central regulator, it has become quite mandatory for the RBI to regulate the uncanny market.
Thus, the introduction of a CBDC will fundamentally do just that, it will change the archaic, fundamental currency and payments ecosystem. But given a certain amount of freedom that will be provided in such a model, RBI will be seen as assuming a greater role as the issuer of digital currency.
It is to be noted that an introduction of CBDC will revolutionize digital payments as digital currencies are currently able to effectively penetrate remote areas. This is because a user only needs internet connectivity and a mobile phone to transact using a digital currency, thus CBDC will help penetrate the banking system not only in urban areas but also in rural areas.
Another enticing advantage that will be included in the model will be a high convenience factor, which would be unconventional given the bank’s lengthy transacting procedures that are a canker for its users. A regulated CBDC will help keep the model safe, and low-cost, thus making the payment experience convenient. The low-cost model will not be only beneficial to the end consumer but also to banks as lower costs will be incurred for printing paper currency.
Another area where a CBDC can significantly and effectively reduce time and settlement risks in cross-border transactions. And it is to be noted that once the domestic model and cross-border transaction regulatory framework is set up and well-defined, the market can positively and optimistically expect a lot of product innovation in a similar space.
It is to be noted that once CBDC will be regulated and will be under RBI’s scrutiny and vigilance it will be essentially given legal tender that will be issued in a digital form. Some of the other key benefits of CBDC have already been achieved via UPI-based payment products. Given, that CBDC will be regulated, it will essentially lower systemic risk and will help introduce diversity and innovation in digital payments.
Though, it is to be noted here that RBI, as the issuer of CBDC, will effectively decide whether CBDC tokens will be interest-bearing and whether the ability to “convert” CBDC to physical cash shall be given or not. Additionally, RBI will also decide upon the degree of anonymity that will be associated with the use of CBDC, which seems quite unlikely as anonymity of character is what will render RBI’s vigilance and analyzing program useless.
Additionally, RBI’s role in the mole restructuring will be quite prominent as its choices will determine the severe implications for the digital payments ecosystem in the economy. Well, it will depend on RBI whether CBDC should be utilized for both retail payments or should its usage be limited to wholesale payments for transactions only. Father, RBI’s sagacious amassing tools will only determine whether CBDC be issued via an account-based or a token-based model.
But this gives rise to an inquisitive question that how will the model work whether the settlement and interfaces in connection with a CBDC be undertaken solely by the central bank itself or will the roles of private banks in the banking and payment systems be invariably changed? Once a wider consumer base for CBDC is built, a reduction in bank deposits would directly and indefinitely affect the pricing of and access to credit. This is when RBI would have to factor in other commercial banks to share the burden.
Thus, the decision to introduce a CBDC to not includes higher analysis and scrutinization. And what really such a centrally monitored digital currency brings to the economy is yet to be deciphered.
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