Counting on digital currency

Now that India has announced the launch of a central bank digital currency (CBDC) in the coming fiscal, RBI must swiftly prepare a blueprint for its phased roll-out. A CBDC could provide households and businesses a convenient electronic form of central bank money with the safety and liquidity that it would entail, give entrepreneurs a platform on which to create new financial products and services, support faster and cheaper cross-border payments across jurisdictions. Already, RBI is examining whether CBDCs should be used in retail or wholesale payments, what the underlying technology (distributed or centralised ledger) and validation mechanism (token- or account-based) should be.

The decline in the use of cash has prompted some central banks to consider issuance of a retail CBDC. In India, despite the surge in digital payments, there is, according to an RBI pilot survey on digital payment habits, sustained interest in the use of cash for small value transactions. It would appear that a CBDC at the gross settlement level would be manageable, easing settlements and compatible with other CBDCs enabling accelerated international settlements. This will also give time for the underlying technology to stabilise.

Technical clarity must be ensured to decide on the underlying technologies that can be trusted to be safe and stable. Given the pace of innovation, that may not be easy. The pros and cons of underlying technologies are yet to be scrutinised for large-scale rollout, given the energy consumption constraints reported so far. The next step is to build a comprehensive CBDC ecosystem, with its operation mechanisms, institutions and rules that coexist with the current currency, through whatever means. The two will coexist for a long time. As India wants to leverage its fintech startup space and reap the benefits of a digital currency -even as it seems to have decided to recognise CBDC as the only digital currency - it would do well to exercise the same degree of caution while moving forward to roll out a CBDC.