Digital Currency

Rahul Sinha

Central Bank Digital Currency [CBDC] is a concept which lies on the foundation built by cryptography and blockchains. Various nations like Bahamas, China, Singapore and Switzerland have already established their hold on Central Bank Digital Currencies.

Central Bank Digital Currencies will not only help in advancing digitalisation of payments but retail, wholesale and Cross-border CBDCs will expand choices and diversify payment option for the users.

Retail CBDCs not just facilitates instant settlements but also reduces the risk of inherent batch clearing of retail payments. To issue Retail CBDCs the Central Bank can also partner with telecom operators to directly roll out digital currencies for public use.

Private operators can undoubtedly deliver near universal payment services. Retail CBDCs amplify financial inclusion and prevents terrorism funding by encrypting transactions, restricting use for certain purposes and enabling traceability.

It provides a token-based platform to offer settlement conditions. The CBDCs can replace RTGS for peer to peer, easy, diversified, transparent system of payments. This change will help to overcome network barriers and control of access. It will nullify the time consumption of payment technologies and provide atomic delivery with respect to transactions.

Factors like diversification of national payments, resilience, security in large value payments and reduction of counter-party credit along with liquidity risk are a few key features among many.

Remittances are the amounts (earnings) sent by foreign workers to an individual in their home country, it not only is a key factor in a nation’s development index but also helps to maintain a stable foreign reserve.

Use of CBDCs and blockchain technologies will help in the following ways:

*    It will reduce the processing of payments.
*    Eliminates all transaction costs.
*    No money will be trapped in pre-funded nostro accounts.

The Crypto space has witnessed the entry of various nations in the past few years.

Bahamian Sand Dollar
The Bahamian Sand Dollar is a success story that motivates people to delve deeper into the space of central bank-backed digital currency. The aim of the Bahamian Sand Dollar was to promote inclusive access to regulated payments and other financial services for “Unbanked” and “Underbanked” communities of the country.

The introduction of CBDC’ helped the service providers to reduce service delivery costs and increase transactional efficiency.

China: Digital RMB
The recent developments by the Chinese economic and technological entities have gained attention all around the world. The official CBDC of China is called DCEP/Digital RMB. It is a structure built on blockchain and cryptographic technology. The digital currencies will be directly issued by the People’s Bank of China (Central Bank) with a goal to increase the circulation of RMB and reshape the current cross-border payment system.

The DCEPs would be transferred through electronic wallets rather than bank accounts.

The Chinese DCEP is in its final stage of pilot surveys where test runs have been made by issuing DCEP to a sample of customers who were selected by a lottery.

While it has been noticed that the Reserve Bank of India has not favoured crypto-currency issuance and trading within the domestic borders, it has also been noticed how the RBI has shown interest in forming its own Digital currency using the fundamentals of blockchain technologies and cryptography. India can implement their CBDC to facilitate various transactions.

The main challenge which can slowdown India’s CBDC on boarding is spreading awareness and convincing the public to go cashless.

[Rahul Sinha, a BA (Honours) student St. Xavier’s University, Kolkata]

Back to Home Page

Frontier
Vol 57, No. 26, Dec 22 - 28, 2024