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Will CBDC be a gamechanger?


Money serves three functions: it’s a measure of value, a unit of account, and a medium of exchange. A government-backed currency should be regarded as a public good, and a public institution should be responsible for providing it.

With the emergence of new technology and constantly changing user needs, the way we make payments is headed for a massive upgrade. In many economies, cash is now seeming to disappear, paving the way for a new form of payment system that is largely digital.

It is on these lines that the term Central Bank Digital Currency (CBDC) has started to gain traction and attention of central banks and financial and tech enthusiasts alike. A CBDC is a legal tender issued by a bank in a digital format. Also known as digital base money or digital fiat currencies, a CBDC is no different from hard cash, apart from the fact that they are in a digital or virtual form.



It is not meant to replace hard cash, but coexist as an additional form of payment method. With the advancement in cryptography and communications technology, central banks are trying to create secure computer-code equivalents of the conventional money that can be credited to public accounts – securely and rapidly – just like conventional money.

The emergence of CBDC happens at a time when there is a constant rise in popularity of cryptocurrencies such as Bitcoin , Ethereum, Tether, Dogecoin etc. However, unlike these private cryptocurrencies, CBDCs are centralised and legal tenders issued by central banks.

RBI and its CBDC

RBI recently said that it is working towards a ‘phased’ launch of a CBDC. It believes that the cost of issuing digital currencies is far lower compared with the cost of printing and distributing hard cash.

Earlier this year, on July 22, while addressing a conference, RBI Deputy Governor T Rabi Sankar said the new digital currency would lower our reliance on cash and further enable cheap and smooth international settlements. He said the RBI-backed currency will protect people from the volatility of the private digital currencies now operational on the web.

“Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value. Some claims that they are akin to gold clearly seem opportunistic. Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities,” RBI said.

The Indian central bank said it is working towards launching a digital currency at a mass scale. It also expressed concern that with the rise in popularity of digital currencies, people may withdraw money from their bank accounts.

“If banks begin to lose deposits over time, their ability for credit creation will get constrained,” RBI said.

The US recently said it would launch five pilot programs over the next year to ‘test the potential uses’ of a US CBDC. It is the first such effort in the US.

CBDCs for a Digital Economy & Government

While the concept of CBDC is still in development, it has garnered immense interest from institutions and governments alike; with initiatives such as the ones being undertaken in the US (Digital Dollar), China (Digital Yuan), Sweden, New Zealand and elsewhere. Apart from being a system of efficient retail payments, CBDCs can help governments better control illicit payments and tax evasion (assuming the central bank tracks payments in a database). This can also help governments combat money laundering and terror financing.

A digital currency shall also help governments in the quick transfer of public funds or emergency grants in a crisis situation (much like the Covid-19 pandemic). Payments made using CBDCs can also reduce the burden of settlement risk on the financial system.

But a critical success factor for the adoption CBDC would be its efficient integration with the existing banking and payment applications to ensure flawless operations. The simplified regulatory and managerial requirements of the digital system will also help governments reduce operational and technological maintenance costs significantly.

Types of CBDCs

CBDC are basically of two types:-

Account-based: An account-based CBDC works just like a regular deposit account. It is also known as the central bank electronic money. Much like our regular bank accounts, a user is required to set up an account, following which s/he can perform transactions, including sending and receiving of the digital currency.

Digital tokens: The token-based system of CBDC involves the transfer of an object of value from one wallet to another.


Risks & Opportunities


The fear is that in the absence of the right policy framework, CBDCs could potentially weaken the banking system in the long run by denying them access to deposits and revenue. CBDCs may also pose a threat from a cyber-security perspective. Further, in nations with low financial literacy, the dependence on a digital form of payment may substantially lead to an increase in fraud and financial crimes.

Furthermore, for an economy to depend on a virtual currency, it would require deeper penetration of high-speed Internet and telecommunication services.

Looking at the brighter side, unlike physical cash, a digital currency will be much easier and cheaper to track and eventually lead to an efficient, regulated and legal tender-based payment system. It shall ensure that the transactional currency of a country remains consistent, and outliers can be identified.

An easier way to track such a currency will also assist in tracking unaccounted money in the economy, thus potentially leading to the inclusion of more people into the taxation system. A modern digital payment system will also help settle interbank gross settlements in near real-time, saving consumers the hassles of later dates, according to the Bank for International Statements.

The power lies in the implementation!

(The author, Samrat Kishor, is a Tech Strategy Consultant & Entrepreneur, Golden Next Ventures. The views are his own)



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