Challenging time for CBDC

Indeed, the digital payments ecosystem in India has undergone a remarkable transformation over the past five years, establishing India as a frontrunner in real-time payments transactions. This progress is commendable, but to achieve widespread adoption of the Digital Rupee, policymakers must foster an environment that encourages greater private sector involvement and incentivizes legacy players to embrace new technologies.

CBDCs are digital currencies issued by central banks. Their value is linked to the issuing country’s official currency. Central bank digital currencies (CBDCs) are the digital form of a government-issued currency that isn’t pegged to a physical commodity. They are issued by central banks, whose role is to support financial services for a nation’s government and its commercial-banking system, set monetary policy, and issue currency.

CBDCs have the opportunity to gain acceptance by the financially excluded for digital payments. CBDC can then serve as an entry point to the broader formal financial system.

According to data compiled by Moneycontrol on the wholesale pilot of CBDC, in November, transactions worth Rs 7,140 crore were settled using digital currency, with the number of trades registered being 759.

The success of CBDC-based cross-border payments depends on achieving scale and and participation. Instead of pursuing a series of bilateral trade alliances, a more effective approach may involve the establishment of a multi-nation trading bloc within a multi-CBDC exchange platform, they said.

However, challenges surrounding governance, capital control, interoperability, anti-money laundering, and the fight against terrorist financing may pose obstacles to this kind of international cooperation.

RBI should adopt a cautious approach, following the lead of other central banks that prioritise extensive research and sandbox testing before implementing market pilot programs, experts says.

There are a few possible explanations for this decline. One possibility is that banks are simply not seeing the value in using the CBDC for G-Sec settlements. The current system using electronic funds transfer (EFT) is well-established and efficient, and there may not be a compelling reason to switch to the CBDC.

Another possibility is that there are technical challenges associated with using the CBDC for G-Sec settlements. The CBDC is still a relatively new technology, and there may be kinks that need to be worked out before it can be used for large-scale transactions. Additionally, the CBDC may not be as well integrated with existing trading platforms as EFT.

Going forward, RBI can explore opportunities to facilitate foreign central banks to hold reserves in Indian rupees and enable direct settlement in rupees, potentially through currency swaps, experts said.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA