Implementation and performance of CBDC across economies and India’s opportunities and obstacles for the same

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Guest Post by Arnab Sarkar, a PGDM student and Ranjitha Ajay, Assistant Professor of Finance at Great Lakes Institute of Management, Chennai.

Central Bank Digital Currency (CBDC) is a digital or virtual form of legal tender issued by a central bank. It functions in the same way as fiat money and can be exchanged for fiat money in a one-to-one ratio. CBDC is not similar to private virtual currency (VCs), as VCs do not have any intrinsic value, have no issuer, and are not convertible in one-to-one ratio into sovereign currency. However, CBDC would be a sovereign currency in electronic form, and it would appear on a central bank’s balance sheet as a liability (currency in circulation). The insane growth of VCs and since it is not regulated due to its Peer to Peer (P2P) transaction system, the central banks need to come up with an alternative for the same to safeguard the public from the volatile nature of VCs. In addition to this, the need for CBDC stems from the fact that central banks across economies want to popularize a digital mode of transactions that is more stable and secure and to incorporate the ease of transactions, easier international trade, accountability in the blockchain, and strong security features of digital currency into the existing fiat currency.

Though the word ‘Digital Currency’ is buzzing over the last few years, the idea was originated decades before. It was David Chaum who first came up with the concept of digital cash and incorporated his company DigiCash which unfortunately filed bankruptcy within just 10 years of commencement. Fast forward to 2021, 86% of the countries is actively researching on central bank-regulated digital currency. Recently the deputy governor of the Reserve bank of India (RBI), Mr. T Rabi Sankar confirmed that they are working on the implementation of CBDC in a phased manner in the wholesale and retail segments.

No doubt, the digital currency infrastructure reduces the cost of printing currency, reduces the settlement risk and, time zone difference would no longer matter in currency settlement, but the most important aspect of Digital Currency is the record of income and spending, which can be used as supporting data for micro-loan applications. This is what the Bahamas government stressed upon while launching their first Digital Currency “Sand Dollar”. In October 2020, the Sand Dollar became the world’s first CBDC to move beyond the pilot stage and achieve an official launch. When the digital money was released, it was immediately available to all Bahamians, while integration with the commercial banking system was phased in. The Eastern Caribbean Central Bank (ECCB) has worked with various banks, credit unions, and Bitt, a fintech company to create a new payment option, called “Dcash”, and successfully launched it on 31st March 2021, with the partnered nations, namely-Anguilla, Antigua & Barbuda, Commonwealth of Dominica, Grenada, Montserrat, Saint Lucia, Saint Vincent & the Grenadines, and Saint Christopher (St Kitts) and Nevis by utilizing cutting-edge technology. Not only the small economies but also the major economies of the world like China, USA, Japan, UK, etc are in the development phase of their respective digital currencies. China’s digital currency, with the cross-border partnership with Hong Kong, Thailand, and UAE, is

currently in the pilot run. As part of a trial, China is about to distribute $6.2 million in digital currency to Beijing residents. Economies such as Sweden, Ukraine, Singapore, Saudi Arabia, South Korea, are also developing their digital currency and are in the pilot stage similar to China.

On the contrary, few economies like Denmark, Egypt, North Korea, Finland and, Malaysia, have temporarily paused the progress of digital currencies. The reason being the lack of clarity on the practical usage of CBDC rather than the complications of digital infrastructure. In a country like Denmark, where the payment system is secure and efficient, it’s difficult to understand how CBDC could add value that isn’t already provided by existing payment options. Denmark is more concerned about the potential political and reputational risk and hence paused the research on CBDC. Malaysia, for example, has seen a significant increase in e-wallet adoption as customers reduce their use of physical cash due to a variety of factors, including cleanliness concerns. According to a recent study conducted by Juniper Research, the number of unique e-wallet users would approach 4.4 billion in 2025, up from 2.6 billion last year. Instead of focusing on a retail CBDC like China’s digital yuan or Sweden’s e-krona, Malaysia’s central bank has indicated that it would rather launch a trial project to assess the merits of a CBDC. This clearly explains the priorities of different countries on the adoption of digital currency.

There are countries such as Senegal (West Africa) and Ecuador (South America) that failed to implement the concept of CBDC and eventually shut the project. Ecuador was the first country in the world that rolled out Digital Cash. The Ecuadorian Central Bank (BCE) inaugurated the Sistema de Dinero Electrónico (SDE) at the end of 2014. Ecuador has used the US Dollar as its national currency since 2000, with each dollar in SDE backed by an actual dollar held in the BCE. The motivations for the introduction of digital currency were to boost access to banking for low-income people and lowering reliance on cash. Only 5,000 people signed up, despite the BCE’s prediction of 500,000 users by the end of 2015. There were 402,515 accounts by the end of 2017, however, only about 30% of them ever used the facility. The SDE accounted for less than 0.003% of all currencies in circulation in 2016. The SDE’s adoption was limited due to widespread scepticism of the BCE, partly due to previous government defaults, hence the project concluded at the end of 2017. The central bank of the West African Economic and Monetary Union (WAEMU), Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), started working with eCurrency Mint, a Dublin-based digital currency specialist and in November 2016, Banque Régionalede Marchés (BRM), a regional Senegalese bank, announced the debut of the “eCFA”, a digital currency named after WAUMU’s hard currency CFA. The BCEAO, however, quickly rebuked the eCFA digital currency for failing to comply with e-money standards. The initiative lost traction once the BCEAO began to distance itself from it, and was cancelled eventually. Furthermore, the central bank stated that it has no plans to establish a CBDC in the near future.

On 2nd August 2021, the central government of India has launched the “e-Rupee” which is an electronic voucher-based digital payment system. Though it is not equivalent to CBDC, the government can monitor the backlogs of this system to improvise CBDC. The loan application of low-income groups gets rejected or are charged with high interest rate due to unavailability of proper income statements of the applicants. The use of digital currency will help to record the income and spending (exactly what is mentioned by The Central Bank of The Bahamas) of the users. So, the lenders can scrutinize the customers’ transaction history and the probability

of approval of the loan might enhance. In addition, digital currency is expected to improve efficiency that would reduce the overall cost of the banking system.

Experts on the other hand point out several challenges pertaining to the implementation of CBDC. User adoption (the issue we noticed for Ecuador’s case) and security are the other two areas to be focused upon. The most important challenge to be addressed by the authority is the infrastructure requirement for the easy and effortless transactions of digital currency. The data from the Department of Telecommunication shows that the internet subscribers base (including wired, fixed wireless, and mobile wireless) in India as of March ’21 is 825.3 million, out of which rural subscribers are just 322.77 million, with an overall quarterly growth of 3.79%. Hence government and internet service providers need to come together to build the infrastructure specifically in rural areas that will further boost the adoption of digital currency. The implementation of digital currency may not replace the existing financial system rather expedite the process of achieving financial inclusion across economies.



Categories: Knowledge Series, Most Read: 2021-09 (September)

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