Editor || Prajith Reddy
“The question is no longer if but when the CBDC economic rocket will take off” says
Marion Laboure, Strategist at Deutsche Bank Research.
As European Bank is moving ahead with retail CBDC (Digital Euro), the conversation around these currencies has taken centre stage again. A central bank digital currency (CBDC) is a form of digital currency issued by a country’s central bank. It is like cryptocurrencies, except that its value is fixed by the central bank and is equivalent to the country’s fiat currency. There are two types of CBDCs: wholesale and retail. Retail CBDCs are designed for households and businesses to make payments for everyday transactions, whereas wholesale CBDCs are designed for financial institutions and operate similarly to central bank reserves.
CBDC’s around the world
In 2023, 94% of central banks are in various stages of research, experimentation, pilot programme or deployment, a survey by the Bank of International Settlement (BIS) published in June 2024 found. As of November 2024, 11 countries and territories have fully implemented CBDCs which include pioneers like the Bahamas (Sand Dollar), Nigeria (eNaira), Jamaica (Jam-Dex), and the Eastern Caribbean Currency Union’s DCash, which spans multiple nations. China, though still in the advanced pilot stage, is widely seen as a leader in CBDC development, with its digital yuan actively used in trials. In addition to these, over 50 countries are in various stages of pilot testing, and over 100 are researching or developing CBDCs.
In India
India’s journey toward a Central Bank Digital Currency (CBDC) began in earnest in 2021 when the Reserve Bank of India (RBI) outlined its vision to explore digital currency as part of its broader digital transformation strategy. In February 2022, the Indian government formally announced plans for the Digital Rupee during the Union Budget, emphasizing its potential to revolutionize the financial ecosystem. By November 2022, the RBI launched the wholesale pilot (e₹-W) for interbank transactions and securities settlement, collaborating with major banks like SBI, ICICI, and HDFC. Following this, in December 2022, the retail pilot (e₹-R) was introduced in select cities such as Mumbai and New Delhi to test its viability for public use. These pilots aimed to assess the efficiency, security, and user experience of the Digital Rupee, setting the stage for gradual nationwide adoption. Today, India continues to refine its CBDC framework, balancing innovation with considerations of privacy, security, and financial inclusion
Impact
Central Bank Digital Currencies (CBDCs) are set to transform the international financial scene by tackling inefficiencies in payment methods, improving the execution of monetary policy, and advancing financial inclusion. By decreasing dependence on physical cash, CBDCs decrease printing and logistics expenses, aiding environmental sustainability. Instant settlements for both local and international payments enhance transaction efficiency, allowing quicker and more affordable transfers,an important benefit for global trade and remittances. Financial inclusion represents another significant advantage, as CBDCs offer underserved communities access to secure digital payments via mobile technology, lessening dependence on conventional banking
systems.
CBDCs further improve central bank oversight of monetary movements, allowing for more accurate execution of monetary strategies, including targeted stimulus or negative interest rates. Furthermore, they mitigate the risks tied to private cryptocurrencies, providing a regulated digital option that enhances financial stability. Nevertheless, possible risks encompass privacy issues, since CBDCs could facilitate enhanced monitoring of transactions, along with the threat of disintermediation, where commercial banks might see a decline in deposits due to CBDCs, impacting their lending capabilities. From a geopolitical perspective, CBDCs have the potential to change the supremacy of reserve currencies such as the U.S. dollar by allowing nations to circumvent conventional global payment networks. With countries such as China, India, and Nigeria spearheading adoption initiatives, CBDCs are poised to foster innovation while addressing the challenges of cybersecurity, public confidence, and regulatory supervision.
Risks
CBDCs present various risks that need to be tackled for successful implementation; one key concern is privacy, as the centralization of transaction data could lead to increased monitoring, jeopardizing personal financial confidentiality. Cybersecurity vulnerabilities pose major issues, since CBDCs are susceptible to hacking, fraud, and technical failures, which could destabilize economies. Additionally, there is a risk of disintermediation, as individuals may move deposits from commercial banks to CBDCs, reducing banks’ ability to lend and possibly jeopardizing the stability of the financial system. Operational challenges, including sustaining robust infrastructure, scalability, and resilience, are significant, especially in regions with limited technological resources. Furthermore, global issues could arise, requiring international collaboration to prevent arbitrage and unlawful activities. Ultimately, geopolitical risks might rise as countries with advanced CBDCs, like China, could challenge the dominance of conventional reserve currencies such as the U.S. dollar, potentially changing global power dynamics.
Conclusion
The emergence of Central Bank Digital Currencies signifies a pivotal change in the worldwide financial environment. As we approach a digital currency revolution, the path of CBDCs is evident: moving from a trial idea to a possible widely used financial tool. The swift global embrace – where 94% of central banks are involved in CBDC studies and 11 nations have introduced digital currencies – indicates a significant change in our understanding of money and financial exchanges. Although the possible advantages are considerable, the way ahead is fraught with difficulties. CBDCs offer improved financial inclusion, more effective monetary policy, and simplified international transactions. They provide a controlled substitute for unstable private cryptocurrencies and create opportunities for nations to enhance their financial systems. Nonetheless, significant issues regarding privacy, cybersecurity, and possible disruption to current banking systems cannot be ignored. Nations such as China, India, and Nigeria are at the forefront, showing that CBDCs represent more than just a fleeting trend. They embody a strategic method for updating financial systems, catering to the demands of progressively digital economies. With advancements in technology and the development of regulatory frameworks, CBDCs are likely to become a more essential component of the global financial system.
The future of currency is digital, with Central Bank Digital Currencies set to lead this change. Although obstacles persist, the promise of more inclusive, efficient, and innovative financial systems makes CBDCs a development to monitor closely in the upcoming years.
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