This article has been written by Priya Nandi pursuing a Diploma in International Business Law  at LawSikho, and has been edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction 

India is among the very few countries that are launching their own central bank digital currency. Which are digital rupees. RBI has called it e-Rupees and it will be officially launched in 2-3 months. Think of an incident where you are travelling to a remote area. It usually happens when the autorickshaw or taxi drivers refuse to take payment through UPI or any other online payment mode and ask you to pay in cash. What if he can not refuse to accept your online payment mode, or if he is bound to accept the payment in the digital mode itself?

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So, first, the question that arises here is what are E-Rupees or CBDC, which have been recently launched?

Here is the answer to these questions, which I have discussed in the above summary. A person cannot refuse to accept your online payment mode if you wish to pay your bills through a digital payment mode. So, to sum up, a simpler description of digital payment is that it is a mandate for every citizen of the country after the launch of the E-Rupees monetary policy.

CBDC and e-rupees

CBDC, or e-Rupee, is a form of real physical money in digital form. Utility wise it is exactly like cryptocurrencies. Also, it is similar to the UPI payment system, but it will be regulated by the RBI. This means RBI has been accepted as legal tender. Whereas in digital currency, we can find the benefits of cryptocurrencies as they will be routed by blockchain technology, which will include e-wallets as crypto wallets, and in addition, they will be legal tender fiat money accepted legally.

After analysing the explanation of CBDC, you might have a few questions

  • How is CBDC different from the UPI payment mode?
  • What was the harm of cryptocurrencies? How are these e-rupees different from cryptocurrency?
  • What was the issue with physical cash?

How is CBDC different from other UPI payment modes

When we make UPI payments via this app, such as Phonepe, Google Pay, Paytm, etc., it takes 2-3 seconds, and sometimes the transaction fails. This is because in UPI payments, the settlement between banks happens in the background.

Eg- you paid someone via Phonepe, then it may show the payment is credited and debited, but in the background, the settlement of banks is involved, which takes at least 1 to 7 days. But in CBDC, there is no bank involvement in any settlement. At the same time, when you receive the money, the settlement is done in cash, whereas if you pay cash to a person, there is no bank settlement involved; it is between the two parties, the payer and the receiver. Also, if there is any money in your wallet, you can reach out to the bank, and for physical cash, they will also provide you with the cash. This is how the e-rupee is different from other payment modes.

Differences between CBDC and cryptocurrency

The first difference is that cryptocurrencies are decentralised and de-regularised. Nobody in the world is responsible for the functioning of cryptocurrency; people like you and me who’re spread across the world are responsible for it.

So, in that way, cryptocurrency is decentralised. But the e-rupee will be centralised and legalised by RBI, and RBI will be responsible for the end-to-end functioning of the e-rupee. That’s all there is to the basic difference.

Physical cash and CBDC

CBDC is exactly the same as physical cash. There is no such difference; only the e-rupee is digital cash, which is kept in a mobile wallet rather than in a leather wallet as physical cash.

It is convenient to use as it does not involve the risk of carrying physical cash, which may get lost, burned, or wet. Also, it is easy to track, as we have all the transaction histories of the payments made, so there is less chance of fraudulent cases.

Reasons for launching CBDC

The main reasons for launching CBDC are:

  • Apart from India, there are 83 countries that are already working on launching their digital currencies in 2011. After seeing the massive adoption of cryptos, all countries understood the need for their own digital currencies.
  • The Indian Government has been trying hard to get rid of physical cash for so long now. Physical cash is expensive to print, but digital money doesn’t have any printing costs.
  • The distribution of physical cash to the bank is expensive.
  • Physical cash is difficult to track. Hence, it leads to corruption. To tackle this, the government did a demonstration in 2016, which controlled corruption to some extent but had some massive effects. It slowed down the economy and took us a lot of time to get over it.

CBDC and its impact on the global financial system

The technological evolution in recent years, where AI and blockchain have transformed the traditional activities of all sectors into digital activities with easy and cheaper accessibility. So, the financial system of this technological era has been rapidly changing. Financial stability is the core of the economic development of a country; therefore, financial stability not only benefits the private sector but also helps the government of the country in its economy. As the payment system is the main subject of the economy. Digital payment modes have completely transformed the monetary systems of countries and made them more efficient. Also, the pandemic helped bring about these changes at a very fast pace.

The global financial system has been the result of all economic, political, and technological advancements that have been followed from the beginning until the present. Therefore, to meet the requirements of this changing society, the central banks of many countries have decided to take the initiative to upgrade their monetary policies so that they could regulate the people efficiently in terms of finance, help them avoid the unprotected services of digital payment, and help them avoid the unprotected services of digital payment in a more efficient way with full security. This will not only provide security to the public but also to the government in many different ways by having a track record of the public’s financial transactions and helping the implementation of government schemes more efficiently.

The scenario of today’s society in the field of the global financial system is one of advancement. And the new blockchain technology, such as cryptocurrency or another online payment mode such as UPI, has changed the mindset of how we look at finance and specifically the monetary system, or money. Central banks are now in a position to implement the new monetary system, regulate money, and try to get into the digital world, as they can not deny how important it is to be digitalised. Therefore, they have taken a step towards the CBDC to enhance the efficiency and security of the financial system.

There are about 114 countries, representing over 95% of global GDP, that are exploring CBDC. Also, 11 nations have already launched their digital currencies. In the year 2023, more than 20 countries will launch their pilot CBDC programmes. And 18 of the G20 countries are working on the advancement of their already launched CBDC. Seven countries have already been in the pilot position.

Cross-border CBDC projects

Multiple cross-border projects have already been launched by countries all over the world, and they have been working on them since then. Here are some of them:

Multiple CBDC Bridge (mBridge) – This project has been launched by the Central Bank with four more countries, such as the UAE, Thailand, Hong Kong, and China, in September 2021 for international settlement.

Project dunbar- The banks of countries like Australia, Singapore, Malaysia, and South Africa have launched this project and also achieved two protocols for international settlement in March 2022.

Project Marina- This was also launched in the year 2022 by countries like France and Switzerland in November. The Banque De France, the Monetary Authority of Singapore, and the Swiss National Bank, in partnership with the Euroststem BUS Innovation Hub, have announced a cross-border automated market maker (AMM) project.

There are many more such projects that have been launched by different countries to test out the impact of CBDC, what challenges they will face after officially launching CBDC in their respective countries, and how they can work.

Conclusion

CBDC is a very big leap in establishing the next generation financial system for India, and what is even more important to note is that it’s not just a big deal for India but even for China, France, Switzerland, and America, all of whom are in the race to crack the code for the Central Bank Digital Currency.

References

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