Last week, the US published a report titled The Future of Money and Payments which outlined several characterisations of key issues, such as crypto, Stablecoins, instant payments, and the US central bank digital currency (CBDC), among others.
The report said that the US is working on an instant payment service called ‘FedNow’, which it plans to launch in 2023, and which will be accessible by all US depository institutions and the US branches of foreign banks.
“CBDC would also clear and settle with finality, nearly instantly” the transfer of reserve balances over Fedwire or FedNow service or payments with paper currency, similar to what happens at present, the report said. The US CBDC aims to facilitate instant payments and settlement, thereby giving a boost to the digital economy.
Union Finance Minister Nirmala Sitharaman had also said in her Union Budget 2022 speech that the introduction of a CBDC will “give a big boost to India’s digital economy.”
Arun Krishnan, senior vice president, global head of engineering, Infosys Finacle, the fintech subsidiary of IT company Infosys (INFY), says: “The introduction of virtual currencies by the central banks is a very exciting development in the Indian context. It promises to deliver the power of virtual currencies with the safety that all of us expect in a central bank currency.”
Put simply, the central bank digital currency (CBDC) is a digital form of the existing fiat currency, with the difference being that its records will be kept using a distributed ledger technology (DLT) which might be based on the Blockchain.
Rahul Advani, policy director, APAC region, Ripple, a Blockchain-based payment solution company, says, “CBDCs represent a liability of the central bank, and can be either retail (the digital equivalent of cash for use by households and businesses), or wholesale (accessed only by financial institutions, similar to existing central bank settlement accounts).”
Citing an example, Advani said that they have partnered with the Kingdom of Bhutan’s central bank, the Royal Monetary Authority (RMA), to tokenise their fiat currency, the Ngultrum, via CBDC last year. One of the key objectives of their partnership with Bhutan was to support the kingdom’s goal of increasing financial inclusion in the country to 85 per cent by 2023.
Globally, many nations, such as China, Ghana, Jamaica, and several other European countries are either exploring or have already launched their CBDC products.
For instance, Jamaica’s, CBDC JAM-DEX was launched in June 2022, China’s e-yuan was launched during the Winter Olympics, while Europe has been conducting trials of its digital Euro CBDC since June 2021.
Aman Cheema, head of global real-time payments and CBDCs at FIS Inc. (Fidelity National Information Services), a US-based company, explained the rationale behind nations wanting to launch CBDC.
The larger aim, Cheema said, was to bring the nation into the wider digital economy, and move cash into digital form, which is also very much relevant in the Indian context.
“There is a belief that by having cash digitised, you can bring more people into it and have bank accounts to include them into the common economy. In addition to the digital payment options that we currently have in India, CBDC, will be used as an alternative option. Thus, CBDC can get a nation's GDP to drive in the upward direction,” Cheema adds.
Krishnan said that the introduction of CBDC can result in an “immediate reduction in the cost of handling cash operations by a good 5-10 per cent on a rough average.”
