Digital Currency India Risks and Benefits

• Should CBDC be used for retail payments?
• Should wholesale payments also come under its fold?
• What should be the mechanism for validation?
• What will be the mode of distribution? Directly from RBI or through banks?

What India’s own CBDC means for the future? Many industry experts feel the RBI’s act of evaluating the launch of e-RUPI is a positive sign. It is perceived that India’s own CBDC would help raise the bar for the Indian Rupee. INR may get into the segment of leading global digital currencies. Also, there is a deliberation around the co-existence of CBDC and private virtual currencies in the same ecosystem. The introduction of CBDC will bring about development for the INR technically. The Indian currency will be beheld as responsive to more versatile functionality through more advanced technology. CBDC is a programmable currency. Therefore, if and when the RBI introduces CBDC, it may provide an excellent tool in their hands to measure the efficacy of any state-run program. There are many government programs where financial advances are made to intended beneficiaries. Though the purpose of the programs is already laid out, there are pilferages through the traditional currency route. The CBDC can be so programmed that it does not allow the money to be spent elsewhere. The impact analysis of the program may be done more objectively. How does India’s CBDC affect investors? Cryptocurrency exchanges in India have reported a steady influx of new-age investors. This positive trend has continued in 2021 as well. An increasing number of investors have started trading in the virtual coin space. The high returns have come out as one of the main drivers for this investor behavior. Economic experts are quite optimistic that this still embryonic asset will continue to attract more investors. The younger generation of Indian investors is batting for virtual assets instead of their more traditional cousins. With the introduction of its own digital currency, there may be a slight shift in the trend of investments in India. The private virtual currencies may continue to be popular investment options in India for their higher store value, while the RBI-induced CBDC may be used more for payments. Risks and benefits of CBDC The RBI is seriously considering the introduction of India’s e-RUPI. The Ministry of Finance intends to table the Cryptocurrency & Regulation of Official Digital Currency Bill, 2021 in the Monsoon Session of the Parliament to initiate the process. It is wise to take a look at the benefits and risks that are associated with CBDC. Let us look at some of the potential benefits of introducing digital currency in India:

• If a transaction is done by CBDC, even on a Unified Payments Interface (UPI) platform, the requirement of settlement of funds between the banks of the payer and the beneficiary no longer exists.
• The transactions through CBDC shall take place on a real-time basis.
• CBDC is cost-effective.
• Time zones will not impede the settlement of currencies.
• The RBI saves a considerable amount of money on the cost of printing, storing, and distributing traditional currency.
• Also, there will be considerable savings on the logistics of traditional currency.
• CBDC will create more job opportunities for the young tech talent in India.

On the contrary, some risk factors are also involved in dealing with CBDC. Some of them as under:

• The existence of commercial banks may come under scanner as their role as an intermediary gets eliminated. People shall be investing directly with the central bank.
• Commercial banks may see a large volume of erosion from their deposit base. The customers may start holding a significant share of their funds in CBDC.
• In order to retain customers, the banks may be constrained to raise the interest on deposits.
• To maintain the asset-liability ratio, the banks may have to revise their interest rates on loans upwardly, which may lead to a vicious trap.
• In a country like India, with a high inflation rate, the use of digital currency across borders may result in currency substitution or ‘dollarisation’.
• Digital currencies carry a potential threat for cyber attacks.

To declare that digital currency shall replace traditional forms of currency is still a distant thought. The preference for transactions through cash is still the most popular method. The RBI published a report in April 2021, an analytical study on the paying habits of Indian individuals for retail transactions. The report showed that 54.2% of individuals prefer cash transactions. Payments through cheques are preferred by only 3% of the participants, and around 40% opt for digital payment gateways. For small value transactions, cash is always the most preferred mode. One of the probable reasons for the overwhelming popularity of cash mode of transactions is its anonymity. Experts believe that if anonymity can be plugged into the CBDC system, there may be a gradual shift in preference.