CBDC and the Future of Blockchain in India

• According to PWC, the estimated cost for RBI to manage old bank notes over a 5-year period between 2016 till 2021 was around 4.5 lakh crores.
• As per the World Bank, India is the world’s largest recipient of remittances as it received $87 billion in 2021 with the United States being the biggest source, accounting for over 20 percent of these funds.
• India piloted the Central Bank Digital Currency, or CBDC, in Nov 2022.
• In India, only about 865 million people have access to the internet as yet. Hence an ideal digital currency needs to function offline as well.

The Need For Digital Currency

In FY 22, over 4900 crores were spent by the Reserve Bank of India to print securities. This does not involve any other environmental, social, ESG, or money printing costs and was predominantly borne by four stakeholders – the general public, businesses, banks, and the Central Bank.

The annual Financial Inclusion Index for India for March 2022 is 56.4.

The G20 nations want to prioritize a reduction in the cost of foreign remittances, increase the speed of transfer and reduce the inter-party risk.

There are many more reasons that necessitate the need for a government-controlled digital currency and all of them generate the benefit of reduced expenditure in managing money, reducing risks in the financial system, increasing financial inclusion of the masses, and many more.

So far many other countries like the Bahamas, Australia, Japan, China, USA, UK, and France have started experiments with their respective Central Bank Digital Currencies - CBDC.

Economic aspects of CBDC

• CBDC will be at par with the Indian rupee and will be a sovereign currency.
• It may or may not carry interest, depending on its usage.
• It will be the liability of RBI rather than individual banks.
• No bank accounts will be needed to hold CBDC.
• Using cash allows the identity of the payer to be hidden. - CBDC's may allow that secrecy but for smaller payment limits.
• CBDC will work in offline mode too, without any internet, to allow people in remote areas to be able to use it.
• CBDC issued will be different for retail and wholesale uses. The one for wholesale uses, CBDC-W, may have its uses tied to specific reasons. For ex., CBDC issues as agricultural subsidies may only be used for paying for agricultural purposes.

Technology aspects of CBDC

• While a private blockchain allows secrecy, it is slow to function as a real-time money transaction system. Hence CBDC may use a hybrid infrastructure combining private blockchains with some central authority.
• The platform shall be highly scalable to support very high volume and rate of transactions without performance degradation.
• Must be robust to ensure the stability of the financial ecosystem.
• Must ensure tamper-proof access control protocols and cryptography for the safety of data for both CBDC and transactional data.
• Must allow for cross-platform support, to allow the development of a large variety of client applications using CBDC for financial services.
• Must have the ability to integrate with other IT platforms in the financial ecosystem must be at the core of platform design.
• Must have a highly evolved fraud monitoring framework to prevent the occurrence of financial fraud.

The Future of Blockchain in India

Blockchain technologies have proven capabilities of reducing operating costs, and processing time, providing traceability, and increasing consumer trust.

But all blockchain-based applications require an underlying digital currency to operate. With all digital currencies being in the public domain, with governments having no oversight on who is moving the money, there were clear roadblocks to the governments' adoption of it.

With UPI, ONDC, and now CBDC, India has now achieved the holy trinity of a robust financial system. The government has agreed to the need of allowing businesses to connect to the CBDC system. And they have reinforced their commitment to the use of Blockchain as a technology for the future.

ONDC, which worked on the Beckn protocol, was already blockchain-based.

The introduction of the CBDC will remove all obstacles to using Blockchain as a technology. We see more and more businesses now turning to Blockchain in the time to come.

References

• RBI's published report
• PwC CBDC global index