RBI intends to introduce central bank digital currency (CBDC). It will facilitate digital payments. Just a cell phone and internet will enable a digital transaction. It is safe and convenient. The cost of printing and distribution of paper currency will be saved. It reduces the risk of back-end settlements. It will facilitate cross-border transactions.
A CBDC is primarily legal tender issued in a digital form. It should be distinguished from digital payment products supported by physical currency and private digital currencies such as Bitcoin. Some of the benefits of CBDC are already available in the UPI system.
Adoption of CBDC will depend on its design such as the interface with the intermediaries. It is to be seen whether CBDC tokens would be interest bearing. How CBDC would be converted into cash? What level of anonymity would be given by CBDC?
The issues to be settled are whether CBDC would be for retail or wholesale. It is to be seen whether CBDC would be account-based or token-based. It is to be seen whether commercial banks would be onboarding the consumers or the RBI. There should be a study as to how the private banks would be affected. Could it lead to the reduction of bank deposits? It affects lending and loan pricing.
There is scope for product development around the CBDC by fintech firms and other intermediaries.
CBDC will be a part of payment systems. It will supplement the use of cash (since it is not an alternative to cash). It is just another way of paying for products and services through a wallet. CBDC is one of the wallets available, with the difference that it is issued by the RBI.
In order to shift people from cash, CBDCs may pay interest. It may lead to erosion of bank deposits. If RBI adopts a decentralised model, it will not compete with banks.
It will not substitute cryptos, nor will it compete with it. RBI does not treat crypto as an asset, as it does not have future cash flows, and is volatile because of speculation.
The CBCDs can take off only after an appropriate legislation is passed in Parliament.