Context: The Indian government and the RBI are getting ready to launch a central bank digital currency (CBDC).
Types of Central bank money:
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Physical cash
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Reserves maintained by commercial banks with the central bank. These reserves are in a digital form and are used by banks to manage interbank payments.
Thus, a CBDC won’t change much at the commercial bank level, as their cash reserves with the RBI are already in digital form. Retail CBDCs will essentially be digital currency issued by the central bank, which will exist alongside physical cash.
Why Central Banks want to have their own digital currency?
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Preventing centralisation of digital payment infra:
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Digital transactions have increased over time.
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In various countries, a bulk of this new digital payment infrastructure is being managed by a few private companies.
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For instance, in China, 94% of mobile transactions are supported by Tencent or Alibaba.
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This creates an increased overall risk in the financial system, with the entire digital payment infrastructure being dependent on a few private companies. It also leads to further problems:
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monopolies
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high entry barriers
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potential misuse of data
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safety and security of technology
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Thus, there is a need for central banks to create a new digital payment infrastructure through CBDCs. In the event of serious shocks to the systems of the banks or card companies, a CBDC could be an alternative form of payment.
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The threat of a monopoly might not exist in India because of the mass popularity of UPI, owned by NPCI (National Payments Coporation of India) which is further owned majorly by Public Sector Banks (PSBs).
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Why India requires a CBDC?
Despite the likelihood of a China-like monopoly being almost non-existent in India, it still needs a CBDC for the following reasons:
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Can simplify the complicated cross-border payments system
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China’s push for CBDC: China wants the digital yuan to gain acceptability as a global currency, like the US Dollar. Once it does, it is a matter of time before it starts flowing into the Indian economy. This issue needs to be addressed by India via developing global protocols for the cross-border usage of CBDCs.