The Rise of Cash 2.0: Exploring Central Bank Digital Currencies (CBDCs)
The world is in a rush to develop Cash 2.0 – Central Bank Digital Currencies (CBDCs). Over 100 countries, representing more than 95% of global GDP, are currently exploring the implementation of CBDC projects. While some countries have already deployed e-currencies, others are in the process of running pilots or developing them. The concept of CBDCs has sparked a lot of curiosity, confusion, and even concern. However, no country wants to be left behind the curve.
The popularity of cryptocurrencies, particularly among Millennials and Gen-Z users, has urged central banks to deliver a next-generation payment system that combines the convenience of cash with the characteristics of crypto. In order to ensure end-user comfort and familiarity, most central banks have added the prefix ‘e’ to their respective currency names.
India is one country that has a lot at stake in the development of CBDCs. Its Unified Payments Interface (UPI) has been a globally acclaimed success since its launch in 2016. With over 10 billion transactions in August 2023, worth nearly ₹15.8 trillion, UPI has outperformed the usage of credit and debit cards. India’s financial regulatory system and technology capabilities have impressed other countries, with Singapore, Malaysia, the UAE, UK, and France accepting UPI linkages. India is also pushing for other offerings such as RuPay, which dominates the domestic debit card market with over 860 million transactions, worth over ₹1.6 trillion.
India’s efforts to promote its CBDC are based on a deep understanding of domestic financial realities and a desire to promote payments sovereignty abroad. Here are five factors that will be central to India’s push for CBDC adoption:
1. Next stage of financial inclusion: CBDCs have the potential to extend financial services to unbanked and under-banked populations. Just as UPI brought millions of Indians into the fold of digital payments, CBDCs can reach marginalized communities. China’s digital currency electronic payment system has already demonstrated the potential of CBDCs in remote areas for welfare distribution, providing the unbanked with access to bank services. CBDCs can make financial inclusion even more accessible by being “easier to understand and operate.”
2. Reduced transaction costs: CBDCs can drastically lower transaction fees and processing costs. For example, Sweden’s central bank is developing an e-krona project to offer cost-effective digital transactions, following the example of UPI’s cost-saving benefits. CBDC payments, being real-time, gross, and final, also lower settlement risk in the financial system, providing better stability.
3. Interoperability and standardization: Like UPI, a CBDC can facilitate seamless transactions between digital wallets and payment systems. It can also operate as a single wallet, similar to Jan Dhan. With merchant involvement in the CBDC ecosystem, transactions can happen without a PIN, making it effective for cross-border transactions, merchant payments, peer-to-peer transfers, and remittances. Central banks are committed to minimizing the impact of CBDCs on financial intermediation and credit provision.
4. Efficiency and speed: CBDCs can enable near-instant transactions, meeting users’ specific needs for speed and efficiency. The Eastern Caribbean Central Bank’s DCash, a CBDC, offers quick and seamless cross-border payments. CBDCs can also be fine-tuned for specific sectors like retail or wholesale domestic or cross-border payments. They can overcome hurdles like differential laws, processes, and due diligence requirements, along with time-zone variations, through institutional and regulatory cohesion across sovereign jurisdictions.
5. Enhanced security: CBDCs can integrate robust security mechanisms aimed at financial stability, reducing the risk of fraud and cyberattacks. Like UPI, CBDCs can promise secure transactions. Bahamas’ Sand Dollar, for instance, uses modern encryption and authentication techniques to ward off cyber threats and enhance user trust. CBDCs can provide a viable alternative to individuals who frequently get affected by natural calamities and get disconnected from the traditional financial system.
However, concerns about privacy violation and confidentiality have been raised globally. CBDCs can address these concerns by providing facilities like access options, total or zero anonymity, and limited or 24/7 availability.
Just like the initial skepticism surrounding UPI, the success of a CBDC will depend on sufficient trust. India, with its impressive UPI credentials, has the potential to replicate the success of UPI with the adoption of e-rupee.
As CBDC projects unfold globally, it is clear that Cash 2.0 is no longer a concept of the future but a reality that countries must embrace. The benefits of CBDCs, such as financial inclusion, reduced transaction costs, interoperability, efficiency, and enhanced security, make them a compelling proposition for central banks worldwide. It is now a matter of time before CBDCs become an integral part of our digital financial ecosystem.
