INTRODUCTION:

Over the time with the advancement of technology and increased usage of the electronic money, Central Bank is faced with a decision to introduce a CBDC to strengthen their monetary authority. They have been under pressure to respond to the challenges posed by cryptocurrency and to improve the efficiency of the existing payment system(Ward & Rochemont, 2019).Interest in CBDC was born in 2008 with the financial crisis and the emergence of cryptocurrency and the decrease in the use of cash. Many countries have started exploring the CBDC area and have launched pilot programs like Sweden’s central Bank has launched a digital currency named e-Krona, when it saw a decline in the use of the cash.

Moreover in 2018 only 6% of the total household payments were made in cash. Like wise Uruguay has launched its e-Peso, a retail form of CBDC.Ukraine e-Hryvnia etc.

Figure 1: Map of all countries with forms of CBDC engagement, Source: CBDC Tracker, The B lock

Moreover, In order to keep pace with the changes in the payments space due to the technological changes and the innovations has made the central banks around the world to think whether they can use the fiat currency in the digital form or not(Javaid, n.d.).The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will provide the Reserve Bank of India (RBI) with legal powers to develop CBDC. On January 25th RBI stated that it is trying to find out if there is a need to introduce a Central Bank Digital Currency (CBDC) in India. If there is a need then the central bank might look for ways to operationalize this.

There are two types of CBDC:

1) Wholesale CBDC: Financial Institutions will use this CBDC. It could reduce settlement risk and provide 24/7 availability and reduce cross-border payment costs. Since cross border payments involves many intermediaries, significant cost and add a level of complexity. Wholesale CBDC could help in simplifying the process and aiding in automation(Deloitte, n.d.).These can be used for domestic payments and as well as for cross border payments.

2) Retail CBDC: Individuals, household and corporations will use this. It is available to the public and is widely accessible and digital form of fiat currency. If a CBDC is well designed then it could enhance the financial integrity in comparison to cash. According to an article (Today, 2017) it is said that the RBI and other commercial bank spends about 21,000 crore every year on cash management. A researcher of repute (Kosse et al., 2017) mentions that the cost of cash usage in Canada was 0.5 per cent of GDP but another author (BANKA, 2018) had reported that Albania used 1 per cent and Guyana used 2.5 per cent of GDP. In Uruguay private cost of using cash was 0.6 per cent of GDP (Álvez et al., 2020).By devising an effective retail CBDC a decline in cash usage cost could be achieved.

Figure 2 Showing the taxonomy of money.Source:BIS

OBJECTIVE OF THE STUDY:

The objective is to study the impact of CBDC on the Indian Financial system.

Research Methodology: To complete the study secondary data has been used. The study is based on Literature analysis and study of the current trends.

WHY CBDC NEEDS TO BE EXPLORED:

1. Renovate the Payment system:

There has been an increase in competition in the payments domain by players like Non-Banking Finance Corporation (NBFC) and Payments service Provider and new forms of e-money and digital/crypto currency. These have provided easy access to the people by lowering the barriers to entry.

2. Improve digitization and financial inclusion:

CBDC could help in increasing access to digital payments near about zero cost. In emerging economies where the use of cash is declining in relative to GDP, this could ease the central bank in providing the money in digital form.

3. As a tool to expand monetary and fiscal policy:

CBDC could provide the central bank with a tool to increase fiscal stimulus. This could be used to tap into more granular level of payments system and improve the data integrity at a macroeconomic level (Todd & Rogers, 2020).

4. Reducing dependency on foreign currency:

Dollar is one of the most popular currencies globally and CBDC could help in making the local currency prominent. It could help in making the local currency more competitive and a prominent means of payment.

ADVANTAGES OF CBDC:

Central Banks across the Globe have already been examining the positive impacts a digital currency could have on growth of the economy, financial inclusion, innovation, technology and making the transactions more efficient.

1. Money Transfer without Intermediary:

Transfer of money can be real time and quick to the beneficiary as there would be no need of any intermediary like banks.

2. Evasion of Income tax:

It will be almost impossible to evade tax and cannot practice offshore banking and unreported employed to disguise financial transactions from the eyes of central bank.

3. Easy currency tracking:

Central Bank can easily keep a track of each and every unit of the currency once they introduce CBDC.

4. Replacement of Physical cash:

CBDC would provide for a suitable alternative for the physical cash and reduce the cost of issuing cash.

5. Seigniorage income:

Seigniorage income refers to the difference between the value of money and the cost to produce and distribute it. In the events of disappearance of physical cash, digital currency issued would avoid the reduction of seigniorage income for the governments.

6. Volatility:

CBDC will not have any volatility like cryptocurrency since they will be linked to gold.

7. Control of crime:

Criminal activities like money laundering and terror funding can be controlled and easily tracked and eliminated.

WHY INDIA NEEDS CBDC:

China had already started testing its digital Yuan in May 2020; several other economies like USA, Canada and Singapore have also started similar kind of research projects. USA and china are competing to gain supremacy in the global markets by launching new financial products.

CBDC can be helpful in narrowing the gap which exists between the number of mobile connections and bank accounts in India (Javaid, n.d.)

1. CBDC will help RBI in coming with efficient monetary policies. The effect of these policies can be seen immediately without depending on the commercial banks to implement changes when they feel right.

2. The digital version of the rupee will provide India with an opportunity to promote its currency among its strategic partner and reduce the dependency on the dollar.

3. It will address the issue of tax evasion and money laundering and terror funding. As with the implementation of CBDC it will be easy to keep a check on every unit of the money spent.

4. It will lead to making financial products like loans, stocks more attractive as they can be extended as natural products using smart contracts.

5. Moreover it will help RBI in safeguarding depositors interest by monitoring the transactions across the Indian economy. This will help in finding out the frauds and scams.

6. CBDC will be a big boost for the fintech companies as they will not be dependent on the banks for partnerships. It will create an environment of trust and provide financial assistance to those who were earlier dependent on banks.

CONCLUSION:

The CBDC will help the RBI in not only reducing the operational cost of managing the cash it will also help in attaining financial inclusion and will strengthen the foundation of cashless society. It will not only help the citizens but also help in expanding the digital economy efficiently.

CONFLICT OF INTEREST:

The authors declare no conflict of interest.

REFERENCES:

1. Alvez, M., Lluberas, R., & Ponce, J. (2020). The Cost of Using Cash and Checks in Uruguay. Journal of Central Banking Theory and Practice, 9(2), 109–129. https://doi.org/10.2478/jcbtp-2020-0016

2. BANKA, H. (2018). “Initial findings from the implementation of the Practical Guide for Measuring Retail Payment Costs,” World Bank Private Sector Development Blog,. https://blogs.worldbank.org/psd/initial-findings-implementation-practical-guide-measuringretail-%0Apayment-costs

3. Deloitte. (n.d.). Are Central Bank Digital Currencies (CBDCs) the money of tomorrow?

4. Javaid, A. (n.d.). CBDC in India: What is Central Bank Digital Currency (CBDC)? https://www.jagranjosh.com/general-knowledge/central-bank-digital-currency-cbdc-1612241965-1

5. Kosse, A., Chen, H., Felt, M.-H., Jiongo, V., Nield, K., & Welte, A. (2017). The Costs of Point-of-Sale Payments in Canada. Discussion Papers.

6. Today, B. (2017). “RBI, commercial banks spend Rs 21,000 crore on currency management.” https://www.businesstoday.in/current/economy-politics/rbi-banks-spend-currency-management-cash/story/251299.html

7. Todd, R., & Rogers, M. (2020). A Global Look at Central Bank Digital Currencies. The Block Research, August.

8. Ward, O., & Rochemont, S. (2019). An addendum to “A Cashless Society- Benefits, Risks and Issues (Interim paper)” Understanding Central Bank Digital Currencies (CBDC) By Orla Ward Sabrina Rochemont. March, 1–52. https://www.actuaries.org.uk/system/files/field/document/Understanding CBDCs Final - disc.pdf

Received on 23.04.2021 Modified on 11.05.2021

Asian Journal of Management. 2021;12(4):420-422.

DOI: 10.52711/2321-5763.2021.00063