CBDC IN PRACTICE.

 The fascinating journey of various forms of money in thousands of years of exchange and transactions ranged from early barter system, commodity money to metal coins made of copper, bronze and later silver and gold which have intrinsic value  or title to other debt instruments utilised. When the volume of goods  and services transacted increased several fold  in modern economies paper currencies evolved in the form of  money and served as a medium of exchange, unit of value, store of value and standard of deferred payments.Paper currency has been extensively used and issued by sovereign or central banks as its representative. Meantime not only the cost of issuing paper currencies increased but also checking counterfeit currencies and illegal activities posed grave  problem in India.Fortunately India has been continuously making rapid progress towards innovations in digital payment systems.Creation of robust round the clock electronic payment systems like Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) facilitated easy fund transfer practised were important steps. Developments in digital technology resulted in extensive use of ATM,Online accounts and transactions. Introduction of digital payments system has revolutionized the nature and volume of financial transactions in the country. Internet banking, mobile Wallets, plastic currency (credit/debit cards)UPI (Unified Payment Interface), Immediate payment service (IMPS),and aadhar enabled payments etc enabled manifold increase resulting in digital payments revolution in the country .In addition the Bharat Bill Payment System (BBPS) has also enabled to facilitate cross border inbound bill payments from overseas jurisdiction.RBI has established Innovation Hub(RBIH) for idea generation and development to promote innovation in the financial sector.RBI with RBIH is currently undertaking significant projects including improvement in KYC process and digitalisation of rural finance.Another major breakthrough in digital payment infrastructure is the setting up of 75 Digital Banking Units(DBUs) for delivering digital banking services in 75 districts to commensurate 75 years of our independence. Infact the last decade witnessed unprecedented growth in the digital infrastructure space in both public and private sectors.

The launching of Central Bank Digital Currency (CBDC) pilot project on November 1st 2022 is a revolutionary step  adopted by RBI to provide easy means to speed up reliable sovereign backed domestic payments and settlement systems in virtual or digital form of rupee.CBDC can be broadly divided into two - general purpose retail (CBDC-R) which is used for daily routine transactions made  by consumers etc. CBDC Whole sale transactions on the other hand focus on Interbank transfers and whole scale transactions are made by financial institutions.RBI's current pilot project CBDC as a first step is currently  implemented in   wholesale segment as  CBDC pilot project between financial institutions and nine banks including SBI ,Union Bank, Kotak Mahindra, Yes Bank etc were identified to participate in the pilot project. After one month subsequently CBDC retail pilot projects will  also be launched. As per plan after the success of the two pilot projects CBDC (wholesale and retail)  full-fledged CBDC will be rolled out throughout the country. According to R B I CBDC is the legal tender money issued by a central bank in a digital form . It is akin to sovereign paper currency,but takes a digital form . exchangeable at par with existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value.CBDCs would appear as liability on a central bank's balance sheet as  a digital form of a paper currency .But unlike private crypto currencies that operate without  regulation,CBDCs are legal tenders issued and backed by the central bank. It is the same as a fiat currency or national currency that is  not pegged to the price of a commodity like silver or gold. CBDC, being a sovereign currency, holds unique advantages of central bank money with trust, safety, liquidity, settlement finality and integrity.Introduction of CBDC can surely bring down costs involved in handling physical currency namely costs of phasing out soiled currency notes, transportation, insurance and logistics.Not only CBDC provide easy means to speed  up sovereign backed reliable domestic payment and settlement system partly replacing paper currency but also make cross border payment cheap and prompt by eliminating the need for expensive network of correspondent banks to settle payments. Moreover in countries like India where informal economy is very dominant  operation of CBDC could help both to expand formal economy and accelerate  the pace of financial inclusion .

Some analysts questioned that when the already existing digital payments system prevailing in India is even far advanced  than that of countries like USA and China why we are in a hurry to implement CBDC. In this context both the RBI and RBI Governor were not only vehemently opposed legalizing private crypto currencies in India but also made all research and background work and finally now wholesale CBDC got momentum. Adhering to RBI suggestion Government of India without legalising crypto currencies but started  to tax gains from crypto assets.RBI's CBDC is a centralised,  regulated sovereign digital currency with ledger maintained utilising block chain technology. CBDC can bolster India's digital transactions either token based like a bearer cheque or account based  where anonymity is maintained.Private crypto currencies do not have regulatory approval from the Central bank. Whereas crypto currencies are unregulated decentralised based on block chain technology where Know Your Customer (KYC) and Anti  Money Laundering Laws  (AML) are not necessarily followed. Private crypto currencies are stored in and transacted through designated software applications and networks works in digital form Private crypto currencies like Bitcoin have mushroomed over the last decade and there existed increasing proliferation of digital payments. Paradoxically due to the high volatility and market crash that occurred in cryptos like Bitcoin in recent months, its value plummeted  almost one third from about $60000 to $ 20000 with similar tremors observed in other cryptos as well.  

Although 105 countries are working for introduction of CBDCs most of them are in the development stage and only 11 countries have launched CBDCs so far. They are utilising both retail general use CBDC and wholesale Interbank transactions payments. Both account based (consisting of demat account and KYC) and token based  (stored in app) with direct or indirect  methods or token issue provider are being practiced. There remains some concerns and confusions about the working of CBDC- The existing infrastructure of RBI is not sufficient to roll out CBDC. If interest bearing CBDC is  rolled out by RBI it might promote monetary policy transmission but the disadvantage could be a migration of deposits from banks to RBI impacting the credit creation function of banks which may eventually lead to bank runs.Other challenges are privacy concerns (anonymity),higher costs of technological upgradation, cyber security risks costs for the central bank in  managing  digital currency firewall (Spyware and  malware).However all kinds of government schemes like MGNREGA,DBTs, support to MSMES etc  can be effectively implemented through CBDC. With regard to cross border transactions CBDC is definitely cheaper provided much work has to be done jointly with other countries which is yet to materialise.  

On the whole full proof implementation of CBDC can take India in the forefront of not only in digital currency but also in digital revolution as such with its cheaper,  efficient and resilient currency management system, better implementation of government backed schemes However the vital role of commercial banks should not be eroded.  and for cross border transactions appropriate infrastructure needs to be facilitated.Need to protect anonymity and data protection to customers are important.Technolgical competency may act as a firewall against cyber attack.But In any case CBDC cannot  effectively counter the ongoing speculative activities in the crypto currency market.