Central Bank Digital Currency (CBDC) has been a hot topic for a while in the fintech space, with its idea of being a digital-centralized token that is as same as the fiat currency notes issued by the government. Cryptocurrency, where the tokens traded for profit but these CBDC tokens used as regular “digital cash” you would keep in your pocket. Government-issued CBDC tokens are produced and their creation is monitored in a manner akin to the production of fiat money. These tokens, issued to banks, can “withdraw” them as you do for fiat currency.
CBDC vs UPI
The advantage of CBDC over UPI is that bank ledger involved in the transaction. The model of any UPI transaction is that the funds are moved from the issuing/sending bank account to the acquiring (merchant/ receiver’s) bank account. To avoid such a hassle of the intermediation of bank, CBDC helps you to avoid that. You can just go to your registered bank, add some tokens into your CBDC wallet and use that tokens to make payments to businesses and consumers and those transfered tokens will be funded into the reciever’s CBDC wallet.
Types of CBDC
Depending on the mode of usage, CBDC can be classified into two—
- for general purpose or retail (CBDC-R)
- for wholesale(CBDC-W)
While, CBDC-W is for interbank transfers and related wholesale transactions, CBDC-R, is the consumer token used for general purposes viz, like private sectors, non financial consumers and businesses.
Uses of CBDC
According to Reserve Bank of India, there are a couple of reasons to adopt CBDC due to —
- To reduce the dwindling usage of paper currency and to seek a popularized, more accepted form of electronic currency.
- Jurisdictions with a heavy dependency on physical cash as well as a desire to boost issuance overall effectiveness.
- To meet public’s need for a digital currencies, to avoid the damaging consequences of private currencies which are being appreciated in these modern times.
CBDC’s “security consideration”
Anything digital, leaves its “footprints” behind. To ensure its safety, the Fintech Department of India are taking steps to ensure that the tokens have stability to avoid any potential breaches and cybersecurity threats.
- Security has been the prime design factor, considered while designing CBDCs “since inception”.
- An “enhanced risk management framework” is implemented for CBDC network users with privileged roles. Right now, the back end infrastructure is also being “rigorously tested” to avoid any “to prevent the exploitation of any vulnerabilities”.
- CBDC is segemented into wholesale and retail so that there would be “no single point failure”.
- High level cryptography and quantum resistance is being factored while designing CBDCs.
With the introduction of CBDC to provide significant benefits, it seems India is moving towards more liberal way of financing. Looking at the global world, India is considering to be a part of the “rapid economy” as seen with many innovations since RTGS, UPI and CBDC, now. To consider the market outreach it seems it may require a force of a “tiny bit” of financial literacy to the corner parts of the country for its full effect. CBDC is going through a vigorous market research and it is said it will in effect in the early 2023.