This article is written by Supriya R, pursuing Diploma in Cyber Law, FinTech Regulations, and Technology Contracts from LawSikho.

Introduction

“Take care of you and yours at home, and we can take care of you online” – Tagline of PayPal India. This tagline stood true to many of us when COVID-19 hit us and we were to quarantine ourselves at home for months together in the year 2020. Truly, the spirit and power of transacting online held us together right from paying bills to sending funds to help a maid or ironwala when they had to sit at home without being able to work for a month’s pay since they were forced out of jobs. Indirectly, many of us who were originally shy to wrap our head around digital payments, did come forward and helped aplenty via payments apps like GooglePay or supported a cause via Ketto. As much as we are unaware of the laws that make all this possible at this time and age in a developing country like India, much to our surprise, it is a very interesting aspect to learn how technology has merged with payment systems over the past decade to keep us in the forefront of the digital economy.

Interestingly, in the month of January 2021, the Reserve Bank of India (“RBI”) released its third Booklet on Payment Systems covering the journey of India’s payments during the last decade spanning from 2010 to 2020 in line with the ones published in the years 1998 and 2008 respectively. This booklet encapsulated the transformation of Indian payment and settlement systems over the last ten years and comprehensively describes the evolution of the legal and regulatory framework behind these systems as well as the various payment infrastructures available to the consumers.

Benchmarking India’s payment systems

RBI’s booklet forms a detailed report containing the major milestones achieved by RBI, trends in the payment systems in the past decade including a detailed chapter talking about ‘Benchmarking India’s Payment Systems’. This exercise was undertaken by selecting a mix of 21 countries (including advanced economy countries, Asian economies and BRICS; Brazil, Russia, India, China and South Africa) nations spread across all the continents where payment systems are considered robust, diverse and efficient. The countries include Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Sweden, Turkey, the United Kingdom and the United States of America. 

The summary of the said report contained details of the benchmarking done over a range of indicators from regulation of payment systems to payment instruments and infrastructure. In the summary of the said report, India emerged with a ‘Leader’ or ‘Strong’ rating in the following areas:

Rating	Indicator	Area
Leader	Regulation of costs of payment systems	Regulation
	Features available in Cheque instruments	Cheques
	Number of debit cards issued	Debit and Credit Cards
	Number of ATMs deployed across the country. Per capita cash withdrawal at ATMs	Cash and ATM
	Share of Credit Transfers in payment systems	Credit transfers
	Availability of alternate payment systems; Share of e-Money in payment systems	e-Money
	Citizen to Government (C2G) e-payments; Business to Government (B2G) e-payments; Government to Business (G2B) e-payments	Government e-payments
	Oversight by the Central Bank	Oversight
	Cross border personal remittance flows	Cross Border Personal Remittances
Strong	Laws in place and scope of regulation	Regulation
	Cash in Circulation per capita	Cash
	Number of Point of Sale (PoS) terminals deployed across the country	Debit and Credit Cards
	Volume and growth of Credit Transfers	Credit transfers
	Real-Time Gross Settlement System (RTGS)	Large Value Payment Systems
	Fast payment systems available in the country	Fast payments
	Volume and growth of e-Money	e-Money
	Mobile and Broadband subscriptions	Digital Infrastructure
	Customer safety and Authentication Standards; Ombudsman scheme for Complaints Redress	Customer Protection and Complaint Redress
	Central Counterparty operational in the country	Securities Settlement and Clearing System

This booklet also discusses the challenges currently faced by RBI of its progression to electronic payments from cash and the roadmap it plans to implement to come past the difficulties. One of such roadmaps is for RBI to explore the possibility of a digital version of the fiat currency and its operations in the near future.

What is Central Bank Digital Currency?

A Central Bank Digital Currency (“CBDC”) is nothing but the digital form of the fiat currency of a particular nation. CBDC represents the digital base money and uses digital tokens and blockchain technology to represent the fiat currency in digital form. It is issued by the Central Bank of the country, meaning it is issued and regulated by a centralized, competent authority, for example, the Reserve Bank of India in our country.

Basically, CBDC will amount to a valid legal tender backed by a or foreign currency. 

Key characteristics of Central Bank Digital Currency

• A secure digital instrument equivalent to a paper bill;
• Can be legally used as a mode of payment, a store of value and an official unit of account;
• Carries a unique serial number;
• Will work alongside other forms of regulated currency;
• Issued and regulated by a centralized bank of a country.

Types of Central Bank Digital Currency 

There are two types of CBDC, namely,

• Retail CBDC

Are made widely available to the public, relate to the ability to potentially increase financial inclusion, or to serve as a strategic alternative to physical cash in economies where cash dwindles and

• Wholesale CBDC

Are made available only to commercial banks and clearing houses for use in the wholesale interbank market, and consist of increasing efficiency in domestic or cross-border interbank payments. 

How is a Central Bank Digital Currency different from any other virtual currency?

CBDC	Virtual Currency
Issued by a centralized government agency like RBI	Based on a decentralised infrastructure known as Blockchain Technology
The digital form of a fiat currency	Virtual currency and not e-money/e-wallet
Is a form of legal tender with a suitable amount of monetary reserves like gold	NIL
Governed by the Reserve Bank of India Act	Lacks comprehensive legislation
Volatility depends on the market	Highly volatile
Transactions are private and known only to the individual	Transaction are available to the public and gets recorded in the electronic ledger
Can be equated to the digital version of cash	NIL

How are both CBDC and virtual currency different from electronic money?

As stated in the table above, CBDC is the digital version of fiat currency controlled by a centralized banking authority while Virtual currency is not controlled by a centralized banking authority. Electronic money is a digital alternative to cash that is stored in banking computer systems.

Benefits of Central Bank Digital Currency

• CBDC has the potential for a more efficient payment system.
• CBDC has the opportunity to enhance financial inclusion.
• CBDC could lower barriers to entry for new firms in the payments sector.
• CBDC has the potential to enhance the transmission of monetary policy. 
• CBDC would counter the stable coin initiatives.

Central Bank Digital Currency around the world

Ecuador

Ecuador issued the world’s first-ever central bank electronic money, announcing its plans to issue dinero electrónico (DE) as early as 2014.

European Union

In October 2020, the European Central Bank launched a public consultation and has started experiments to decide whether to create a “digital euro” for the 19-nation currency club.

Bahamas

The Central Bank of the Bahamas officially launched its national digital currency, the Sand Dollar, in October 2020.

Joining the Ecuador, Bahamas and the European Union, several countries like South Africa, Russian Federation, Japan, Singapore, Thailand, USA, Canada, China, UK, Korea, Ukraine, Uruguay, Brazil, Marshall Islands, Sweden, Hongkong, Australia, Turkey, Cambodia, Eastern Caribbean have released public consultation papers or run a pilot project taking steps to come up with their own version of a CBDC which are slated to be released in the near future.

Limitations of Central Bank Digital Currency

The following are some of the limitations of CBDC:

• The disintermediation of commercial banks if consumers move money from bank accounts into CBDC.
• Less bank credit extended at higher interest rates.
• The central bank could need to provide additional liquidity to banks and hence take on credit risk.
• A CBDC involves many moving parts, and if any suffer glitches, cyber attacks or human error, it could reflect poorly on the central bank.
• Risks of dollarization for economies with volatile exchange ranges and high inflation.

Need for Central Bank Digital Currencies in India

I’ve not used my debit card to withdraw money from the ATM in a row in 2 years and the bank with which I have the account sent me an email stating that the physical usage of my debit card will be discontinued. I seriously felt a sigh of relief when I saw the email because I’m pretty sure going to ATMs to withdraw cash to do transactions is a matter of the last century and I’m sure CBDCs are a welcome change and definitely, a happy one at that.

Conclusion

If distributed through the two-tier architecture of commercial banks and regulated intermediates, CBDCs would make consumers gain big if it is globally adopted, thereby reducing costs and lower security breaches, simultaneously reducing the need for having a bank account. If all countries come up with a regulated currency like CBDC and strengthen the data security, this would make a wonderful alternative to the regular currency and that will give the comfort of usage even among the elderly crowd who otherwise struggle to make the switch to online payments. CBDC definitely has the potential to bridge the gap from moving banking completely online only from physical banking and would make it easier with so many uncertainties going on around the world. 

Physical banking services are seldom availed by the younger generation for their banking needs. If CBDCs are provided as an alternative option to withdrawing cash, a lot of discomfort around withdrawing cash and spending them can be avoided in the near future. CBDCs will also make way from being cash only to swiftly moving online easier. A lot of development in this sector by the banking industry can revolutionise the idea of digital money among crowds of all ages as banking itself is a mundane activity. Also, with Artificial intelligence playing a major role in the growth of a country, CBDCs are nothing but a fresh breath of change that the world would welcome with open hands. It’s only ideal that the RBI decides for it and rolls out the digital currencies and puts up a strong fight against counterfeit currencies in the market across the world.

References

• https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=20315#CH1
• https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=andID=923

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