CENTRAL BANK

DIGITAL CURRENCY
SACHIN
AMAN BAJPAI
SHIVANI KAIN
NAVEEN RAJ
CHEENA BANSAL
Introduction Of CBDC
• Central Bank Digital Currencies (CBDCs for short) are, in simple terms, the
digital version of the same fiat currencies that people use in their daily
lives.

• Unlike crypto currencies, like Bitcoin, that operate via block chain
networks in a decentralized way, a CBDC is, by design, a state-issued and
controlled digital asset.

• It can offer many benefits – faster, less costly transactions and high
security, for example.

• CBDCs can also enhance financial inclusion because there’s no need for
consumers to have a bank account to hold such currencies.
 Deconstructing a CBDC
Four key parameters of money:

• Issuer (central bank or private)

• Form (digital or physical)

• Accessibility (wide or restricted)

• Technology (account or token-based)

Fiat Vs. Digital
• Reduction in the cost of Cash

• Ease of flow of money between government and individuals

• Accelerate financial inclusion

• Provide highest degree of security to enhance trust in digital

ecosystem
CHALLENGES
• The government authorities and the RBI would have to work on digitizing the entire currency
circulation model, because converting paper money into digital currencies will surely come with its
complexities and confusion.

• Increased traceability will introduce new challenges around privacy.

• Extreme Care needs to be taken to put together a robust technological infrastructure since these will
be vulnerable to cyber-attacks.

• Commercial banks could be affected due to the reduced intermediation of banks.

• For the CBDC of reserve-currency countries, which are available across borders, there could be an
increase in currency substitution (or “dollarization”) in countries with high inflation and volatile
exchange rates,”
OPPORTUNITIES
• Payments using Central Bank Digital Currencies are final and can limit the settlement risk in the
financial system.

• Transactions can happen in real-time in a cost-effective way and time zones would no longer be a
hindrance in currency settlements.

• the cost of printing, transporting, storing and distributing currency can be reduced

• Avoiding the risk of new forms of private money creation.

• Supporting competition, efficiency and innovation in payments.

 Current situation of CBDC around
the world
• The concept of CBDC is gaining interest among central banks across the world as an addition or
even replacement to traditional money formats.

• The declining rate of cash usage in advanced economies and the need for fast payments, digital advancements
in the financial sector, the need for social distancing amongst people due to COVID-19 pandemic and record
high price of some cryptocurrencies are major drivers for CBDC introduction.

• In May 2020, only 35 countries were considering having their own centralized cryptocurrency — now 81
counties are thinking of having their own CBDC. These 81 countries represent 90% of the world’s GDP.

• Full-scale implementation of a CBDC has only happened in five countries — the Bahamas, Antigua and
Barbuda, Saint Lucia and two Caribbean countries.
 Current situation of CBDC around
the world
China is the front runner

The Digital Yuan is being continuously tested and has already been integrated into the subway system. China will
allow foreign users to use the Digital Yuan during the upcoming Winter Olympics, if they provide their passport
details to the People’s Bank of China.

US has a lot of catching up to do

Of the countries with the 4 largest central banks, the United States is furthest behind in the race to implement
CBDCs. US Federal Reserve is yet to launch its research examining cost and benefits of implementing CBDC.

while Australia, Malaysia, Singapore and South Africa are moving forward with the world’s first cross-border central
bank digital currency exchange program (cen. bank digital currency scheme) led by the Bank for International
Settlements (BIS) Innovation hub.
India’s Case
• To evolve and pursue their public policy objectives in a digital
world, central bank is actively researching the pros and cons of
offering a digital currency to the public.

• In India, discussion of CBDCs has shifted from “if” they will be

developed to “when” they will be introduced and widely used. The
central bank is conducting research on CBDCs.

• It will be instrumental in promoting grassroots level financial inclusivity

and modernizing the banking sector apart from creating a cashless
economy.

• Using digital currencies will enable more transparency and traceability across levels for the financial
services sector.

• A major use case for CBDCs will likely be in the insurance and lending space and also for managing non-
performing assets (NPA), which is being a problem in India for quite some time.
E-Rupi : A Step Ahead
• E-rupi is a new mode of cashless and contactless digital payment to ensure seamless transfer of benefits to
the citizens in a “leak-proof” manner.

• These Pre-paid vouchers are person- and purpose-specific

• Aimed at bridging the digital gap among the unbanked population.

• The successful deployment of e-RUPI can boost India’s GDP by 14 per cent.
POSSIBLE DESIGNS OF
CBDC
There are different choices for a CBDC instrument. As different jurisdictions will have different priorities, there
remains a wide range in design features.

Retail CBDC - Retail CBDC is generally meant for general public and average consumers for conducting daily
transactions. Around 26 Surveyed Jurisdictions are exploring a retail or a general purpose CBDC because It has
the benefits of traceability and anonymity and It promotes financial inclusion and at the same time reduces the
costs of cash printing while presenting a faster shift to a cashless society.

Wholesale CBDC- Wholesale CBDC is more suitable for exchanging and trading among central banks and private
banks. It provides users with the benefits of faster cross- border transactions.. wholesale CBDCs,
mostly in the context of cross-border payments are being explored in advanced jurisdictions like Singapore,
Australia etc.
Role of the central bank and the private
players in the CBDC design
Direct Design- Through this model, central bank
has more control over the issuance and
implementation of CBDC. However, it may also pose
challenges for the central bank to execute the entire
process which involves account-keeping services,
customer verification processes such as know your
customer (“KYC”), anti-money laundering (“AML”)
and combating the financing of terrorism (“CFT”)
checks, transaction verification, etc. Also, there is
one more concern that central bank may end up
competing with the existing payment service
providers.
Indirect / two-tiered model

Indirect model - third parties are involved to

regulate specific activities. Though the third parties
are involved in this model, CBDC still remains a
liability of the central bank so that the users are not
subjected to the default risk of third party. However,
to implement this model, a legal framework would
be required to regulate these third party payment
service providers or CBDC intermediaries.