Digital currency is going to be the next big money. India has taken a right step in announcing a blockchain-driven Central Bank Digital Currency (CBDC) during the next fiscal. This will make the country one of the pioneers in the world, besides giving a big push to digital India.
s many as 15 countries, including China, Sweden and South Korea are already in the pilot phase of having a digital currency. Five of them — the Bahamas, Antigua and Barbuda, Saint Lucia and two Caribbean countries — are in the advanced stages. The Bahamas launched its digital currency, the Sand Dollar, in October 2020. Nigeria launched e-Naira in October 2021. China has been on the task since 2014. It became the first major economy to pilot the project in April 2020.
Gaining momentum
According to the International Monetary Fund (IMF), as many as 110 countries are in the process of starting a digital currency. The fascination for the digital currency is growing fast, as according to one survey, only 35 countries were considering CBDC in May 2020.
The Central bank digital currencies (CBDC) are increasingly viewed as the best answer to check the proliferation of private currencies or decentralised ones like crypto currencies. As explained by Finance Minister Nirmala Sitharaman, the decentralised currencies will be virtual digital assets, not money. The CBDC will mirror the exact value of physical currency, unlike the private currencies.
The gains of having digital currency are many. The IMF is of the view that digital currencies could facilitate financial stability in emerging markets and developing economies. India’s digital currency move could strengthen its monetary sovereignty and internationalisation.
At the micro-level, it improves convenience and efficiency of the retail payment system. Digital currency can ensure greater financial inclusion, more access to financial services, control money laundering, check counterfeiting, and arrest other illicit activities. Currency management will become seamless, smoother and transparent.
Currency management costs
For the government, the biggest gain will be the drastic reduction in currency management expenses. In an interview in 2017, NITI Aayog CEO Amitabh Kant pointed out that the RBI and other commercial banks spend ₹21,000 crore every year on currency management operations.
According reports, the standard cost of printing one ₹500-currency note was ₹2.65 in 2019-20. Printing of a ₹50-note was ₹1.22. As per RBI annual report for 2020, it placed an order for 1,463 crore pieces of ₹500-currency notes and finally 1,200 crore pieces were printed. This gives an indication to the huge spending on printing alone.
It has also been proved, blockchain is the perfect technology to create the digital currency. The inherent advantages of this innovative technology — network, structure, transparency, trust, security, immutability, visibility and traceability, speed, control on quality data, and tokenisation will prove to be the advantages of the digital currency. The integrated platforms for transferring ownership in a secure way will be vital. Smart contract programmability will facilitate seamless automatic payments. The confidentiality features, cost savings and interoperability are added advantages when blockchain is used for digital currencies.
Tech infrastructure
Setting up the necessary technological backbone and integrating the current payment rails with the Blockchain/DLT layer is a complex task and needs be treaded carefully by engaging with the best of expertise available both in India and abroad. A micro-detail oriented execution coupled with a visionary and strategic approach can ensure that Blockchain technology permeates into all segments of society in different domains vastly improving governance while mitigating associated risks.
India is one of the biggest data generating economies with the increasing penetration of IOT, Smart Phones and fast-growing smart cities. CBDC and Blockchain/DLT technology have the potential to enable seamless value transfer between different players and enable unlocking of the value generated. Data sharing can result in enhanced quality of life through better e-governance.
Apart from the legal and legislative framework required, the biggest challenge for digital currency will be to bridge the trust gap among the public. Blockchain being a new paradigm, it is imperative for the government to educate all concerned about its vast benefits to improve governance. This can go a long way in popularising blockchain and then instill confidence in the citizens to make digital currency acceptable and accessible leading to increased transparency and enhance financial Inclusion.
The writer is Chief Business Officer - Blockchain (APAC), SecureKloud Technologies