Decoding Impact Of CBDCs On Digital Payments

CBDCs are going to bring various impacts in different sectors like economy, digital platforms, finance sector, etc

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01 August, 2022

The Reserve Bank of India's (RBI) central bank digital currency (CBDC) is no new thing. Hence many prophecies are being made regarding it. On the budget session of February 2022, Union Finance Minister, Nirmala Sitharaman had first discussed on launching CBDCs, since then there has been a curiosity to know the impacts of digital currency on different sectors.

Jaya Vaidhyanathan, CEO, BCT Digital said, "The Reserve Bank of India’s (RBI) decision to introduce the Central Bank Digital Currency (CBDC) is grounded in providing a regulated alternative to cryptocurrencies in the market, thus countering the volatility and safety issues seen in private cryptocurrencies. Since the CBDC is issued by the RBI, the expectation is that it may not be affected by the wild fluctuations usually seen in cryptocurrencies the world over. We may see concrete developments as early as FY23, but the process of launching CBDC as a whole is deliberately paced gradual so as to ensure minimal disruption to India’s financial services market."

Impact on Digital Payments platforms

The RBI Governor, Shaktikanta Das had said that CBDCs will have some clear benefits on other digital payments systems. He said that payments using CBDCs are final and thus reduce settlement risk in the financial system.

Vaidhyanathan said, "CBDC would lead to more robust and efficient legal tender-based payments. It will also prevent private counterparts from monopolising transaction data. The digital currency’s inception would reduce dependency on cash, provide higher seigniorage due to lower transaction costs, and reduce settlement risk. With India becoming more tightly integrated with the global economies, the rupee is finding more acceptance slowly but steadily. A CBDC could be a force multiplier to such efforts as digital currencies can be much more easily tracked and transacted across borders. Thus, further developments on the RBI’s CBDC will be eagerly awaited by all stakeholders."

Will it diminish the importance of Physical Money?

CBDCs are different from physical money, which are likewise supported by the power and credit of a national bank, and are one more commitment of the establishment. CBDCs ease money related strategy execution by eliminating middle people from the approach by laying out an immediate association between the public authority and the typical resident. Banks and monetary establishments answerable for dispersing public money are not generally needed all the while.

"The CBDC is expected to provide a new form of money that’s regulated, robust and efficient. It connects the central bank with users, and the blockchain removes any need for multiple financial intermediaries. All of this translates to lower transaction costs. The CBDC could be used to complement physical currency, or it could replace it altogether in some applications. Many other countries are considering introducing CBDCs, and more research is going into their feasibility. In the future, CBDCs may be used for low-value transactions, bank transfers, and so on, effectively replacing cash in these scenarios", said Vaidhyanathan.

Digital currency has lot of benefits, hence its launch may not lead physical cash to totally disappear but may decrease its usage.

She added, "CBDC has the potential to help central banks increase their control over the money supply, reduce transaction costs and make financial regulation easier. At a macro level, the risks are that it may lead to unprecedented power being concentrated in a central authority. While implementing the CBDC, a primary concern would be whether to operationalise it at the retail level or at the level of gross settlement, and whether its utility be account-based, tokenised or hybrid. As India continues to explore such nuanced digital imperatives, setting them up will require careful calibration and a distinctive approach."