Counting on Digital Currency – The Economic Times

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Now that India has announced the launch of a central bank digital currency (CBDC) in the next fiscal year, RBI must quickly prepare a plan for its gradual rollout. A CBDC could provide households and businesses with a convenient electronic form of central bank money with the security and liquidity that would entail, give entrepreneurs a platform on which to create new financial products and services, support more cross-border payments faster and cheaper between jurisdictions. Already, RBI is considering whether CBDCs should be used in retail or wholesale payments, what should be the underlying technology (distributed or centralized ledger), and the validation mechanism (token-based or account-based).

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

Technical clarity must be ensured in deciding which underlying technologies can be trusted to be secure and stable. Given the pace of innovation, it may not be easy. The pros and cons of the underlying technologies still need to be considered for large-scale deployment, given the power consumption constraints reported so far. The next step is to build a complete CBDC ecosystem, with its operating mechanisms, institutions and rules that coexist with the current currency, by all means. The two will live together for a long time. As India wants to leverage its fintech startup space and reap the benefits of a digital currency – even though it seems to have decided to recognize the CBDC as the only digital currency – it would do well to exercise the same degree of caution while going ahead to ride a CBDC.

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