RBI launches digital currency (CBDC), but what does it mean?

On 01st November, the digital rupee also known as the Central Bank Digital Currency (CBDC), was finally launched. It has only been launched for the wholesale segment and not for the retail segment. As a test case, on the 01st of November, government securities market deals were partially executed using the CBDC. The advantage of the CBDC is that there is no clearing corporation involved in such deals. Unlike the normal T+1 clearing and settlement for government securities, in the case of CBDC, the clearing and settlement will happen on T+0 basis; i.e. on the day of settlement itself. 

Here is what you must know about the entire concept of the Central Bank Digital Currency (CBDC).

    a) As of now, the RBI has not launched the Digital Rupee for the retail segment and the pilot is restricted only to the wholesale segment. However, the first pilot of the Digital Rupee for the retail segment is expected to happen within a month. 

    b) The reason the RBI started rollout of CBDC in the wholesale segment is that the use of the Central Bank Digital Currency (CBDC) has the potential to make the interbank market more efficient. In addition, it will also be instrumental in reducing transaction costs by doing away with the need for settlement guarantee infrastructure or collateral.

    c) Most of the large banks are already participating in the digital rupee pilot. This list includes State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC for the wholesale debt segment.

    d) One of the big advantages of the digital rupee (CBDC) is that it provides a safe and reliable means of payment for direct transfer programs of government welfare programmes. There is a complete audit trail and the transfers are real time, so monitoring of end use becomes a lot easier.

    e) In many of the government schemes, leakage of pay-outs and reaching out to the last mile are the big challenges. In such cases, the Central Bank Digital Currency (CBDC) can be leveraged to ensure no leakage and automated release of payments on the completion of certain tasks. Payments can be easily linked to milestones in CBDC.

    f) While the pilot is for wholesale markets, CBDC has a lot of applications for retail usage also. It can become an alternate to the plethora of wallets that are floating around in the system today, many of which are either not reliable or of dubious credentials. A wallet backed by the RBI automatically has a lot more credibility.

    g) The Central Bank Digital Currency (CBDC) is something  you can call flexible and multi-efficient. It enables payments between consumer to consumer; between consumer to business and also between business to business or B2B as we know it. The good thing is that digital currency is just a complement to physical currency and does not replace it.

    h) Among the various unique applications of Central Bank Digital Currency (CBDC) are micro lending in a smooth, seamless and efficient manners. For instance, CBDC can help lenders draw up a more precise profile of the MSME borrowers. This can be used to promptly meet MSME financing requirements. In the case of special stimulus for MSMEs, the execution through CBDC can be a lot more efficient.

    i) One of the big advantages of the digital currency is the audit trail of its path. Normally, when borrowers take personal loans or business loans, there is not adequate monitoring of end use. Quite often, loans become bad since they are not monitored properly. Digital currency lending automatically makes it possible to monitor end use with audit trail.

    j) Speed of settlement is another big advantage. Unlike the current arrangements where you have to wait for T+1 or T+2 for settlement, everything can be instantaneous in the case of Central Bank Digital Currency (CBDC). This brings about speed and efficiency in transactions and reduces risk.

    k) Unlike the popular belief, the CBDC is nothing like a Crypto. Firstly, Crypto does not have central bank backing, while the CBDC has the full backing of the central bank. Cryptos create money supply while CBDC does not really create money supply since it is fully fungible with cash.

The digital currency has been officially launched. The full array of its advantages would only be visible once it is extended to retail markets too.