What is central bank digital currency (CBDC) or e-Rupee and what are its benefits?
Many central banks in the world, including the Reserve Bank of India, are contemplating introducing Central Bank Digital Currency. More than 100 countries, including 19 G20 nations, are one way or another exploring central bank digital currencies (source).
What is a CBDC, in India’s case e-Rupee?
The retail CBDC was launched by the RBI as a digital token on 1 December 2022. It is a digital equivalent of a promissory banknote that can be electronically transferred from one holder to another. It can be spent in the same manner cash is spent. It is the Indian version of digital currency.
As the name “digital currency” suggests, this currency is digital rather than physical money. When you transact with digital currency, instead of “fiat” notes, you exchange digital currency. It is like paper money but instead of transferring paper notes and coins from one wallet to another, you transfer digital currency from one digital wallet to another.
Aren’t you already carrying out digital transactions when you use PhonePe, Paytm, the BHIM app or Google Pay?
Yes, you are. Then how is this digital currency different?
The digital transactions that you carry out with an app like PayTM use UPI. It stands for Unified Payments Interface.
Although, when you are making a payment, it may seem the payment is going from your mobile phone to another’s mobile phone, this interface uses bank transactions. The money is transferred between bank accounts. It takes time. It also costs you money whether you realise it or not.
Other forms of digital transactions are debit and credit card payments and net banking. Again, these transactions go through bank accounts.
But a CBDC is like an actual note that you may have in your leather wallet that you keep in your pocket.
Suppose you draw Rs. 2000 from your bank as currency notes. After you have drawn the money from your bank, whether you keep it with you for years or you give it to someone else (you pay a barber Rs. 350 for a haircut, for example), it is up to you. No third party is involved. No one even needs to know whom you have paid (unless a receipt is involved). You can throw the notes away for all anyone cares.
On the other hand, when you make the payment using your UPI application (again, Rs 350 to the barber) your bank knows how much the payment is, and to whom the payment has gone. Also, it is up to the capacity of your bank’s server how much time it takes for the payment to go through.
Suppose using the CBDC wallet app you draw Rs. 2000 from your bank. The traditional money is withdrawn from your bank and an equivalent amount is added to your digital wallet. Now there are Rs 2000 less in your bank account but you have Rs. 2000 in your CBDC wallet just like currency notes. Just like currency notes, you can pay your barber Rs. 350 through a digital transaction – the money goes from your wallet to the barber’s wallet. No intermediary is involved. The money goes immediately. You don’t have to rely on your bank for the payment to go through. Just like paper currency.
Why is there a need for CBDC?
One of the biggest motivations for the issuance of CBDCs is settlement finality and consequently, reduction in settlement risks in the financial system. Also, the flow of cross-border monetary systems is difficult between countries. With the introduction of CBDC there will be more real-time, cost-effective and seamless integration of cross-border payment systems. The cost of transactions in India is the lowest in the world. The e-Rupee will facilitate greater financial inclusion as more people will be able to make and receive payments 24 x 7, extremely fast.
Printing paper currency and coins is costly. On an average India spends Rs. 4500 crores on minting money in this course does not include environmental, social and governance cost borne by the general public, businesses, and banks. There are innumerable delays in reconciliation and settlement.
Is the public ready for CBDC?
40% of all monetary transactions in India are digital (source). Overall digital payments will be equivalent to 46% of consumption GDP by 2027 and mobile payments will constitute 32% of consumption GDP. In 2021, payments over $ 3 trillion were processed using digital instruments in India. These are projected to reach $ 10 trillion by 2026. According to the RBI, there was an increase of 216% in digital payments between March 2019 in March 2022 (source).
It means Indians are already using digital transactions to a great extent. When CBDC becomes commonplace, it will be just like any other transaction from one wallet to another which, in multiple forms, is already happening.