A currency for the VUCA world

Global financial institutions have seen a striking intensification in financial crime over the last few years and this has burdened them with large monetary costs, reputational damage and loss of customer trust. Financial institutions over the last decade have been fined about $20 billion in antimoney laundering linked penalties and many central banks across the world are examining the idea of exploring CBDC or Central Bank Digital Currency to create a more secure payment system and pave the way for a more cashless future.

A digital payment token issued by the central bank of a country, CBDC, is fundamentally different from bitcoin, even though both are based on blockchain technology. Unlike bitcoin, which is a decentralized cryptocurrency operating on a public blockchain that no central bank or corporation can control, CBDC is nothing but traditional currency in a digital form that will be issued as well as governed by central banks. Unlike cryptocurrencies, CBDC will be recognized as legal tender. Despite its aversion to cryptocurrencies and the resultant ban in 2018, the RBI is also considering the issuance of a rupee-backed digital currency in India.

Will adoption of a national digital currency really help India as it aims to transform from a cash driven society to a digital payments powerhouse? Let’s look at the opportunities CBDC presents in the Indian context.

Why Must India Adopt CBDC?

Mainstream adoption of CBDC can help India transform into a digitally empowered country and fulfil the Government’s vision of achieving a cashless economy. With both banking and non-banking institutions investing in improving the digital payments architecture, more and more innovative payment products and services are being introduced into the market. India is very well positioned to boost payment digitization and tap into the incredible growth potential it has to offer.

Cash is still king in India even though its use is decreasing partly thanks to demonetisation and Covid-19. According to RBI, India's digital payments per capita has increased over five times since 2015 to 22.4 transactions in the year ended March 2019. While this is significantly lower than China, which in 2017 had recorded approximately 96.7 cashless transactions per consumer, it is a huge improvement in the context of digital money movement in India. CBDC can help India reduce its reliance on cash and modernize the payment system. Its benefits are manifold for both traditional and non-traditional financial institutions participating in India’s ever-expanding digital economy:

1. CBDC will boost domestic economies as well as facilitate fast and seamless cross-border transactions.

2. CBDC will reduce the safety risks of carrying physical cash on oneself.

3. It will also help reduce the expenses of banking services, by reducing the cost of printing, securing and handling cash.

4. One of the most significant advantages CBDC offers is improved traceability. Compared to cryptocurrencies, it will help RBI control the cash supply better and track it efficiently in a blockchain network. This will help the government be extra-vigilant towards India’s shadow economy, combat corruption and improve transparency in financial transactions.

5. CBDC can also help tackle financial crimes like counterfeit cash, tax evasion, and other fraud risks and improve customer trust in financial institutions.

6. Beyond reducing the amount of cash in circulation, digital currency can also help democratize financial services and boost financial inclusion. With CBDC, India’s vast unbanked population can now access online payment systems with only a mobile phone, and internet.

Currently, China is leading the CBDC implementation race and is the first G10 country that is pilot-testing its digital currency DCEP (Digital Currency Electronic Payment) backed by the People’s Bank of China. Other countries are also considering introducing CBDC in their financial ecosystem. The central banks of countries like Japan, Canada, Sweden, Switzerland, the European Central Bank (ECB) and the Bank for International Settlements (BIS) are collaborating to share learnings from their CBDC projects and explore the benefits of digital currencies. India too needs to assess the possible use cases of an RBI-backed digital currency as it can help fulfil its vision of building an innovative, resilient, and globally competitive digital payment landscape.

The Way Forward for CBDC in India

For a successful implementation of CBDC in India, the roadblocks in digital payments such as lack of awareness, poor tech infrastructure, cultural barriers etc along with the needs of the unbanked and underbanked population need to be extensively reviewed and addressed. RBI, despite the imposition of ban on virtual currencies, has recognized the potential of CBDC to make the payment infrastructure in India more secure and efficient. In the 2020 circular ‘Distributed Ledger Technology, Blockchain and Central Banks’, it detailed a Proof-of-Concept for CBDC, assessing digital currency projects from all over the world and highlighting their relevance for the Indian payments landscape.

Where do we go from here, and how do we build and scale up the digital currency ecosystem in India? And most importantly, how do we ensure the digital transformation of the intended beneficiaries of this currency? The successful adoption of blockchain technology in India will depend on the regulatory bodies creating a robust regulatory framework that will help govern the technology and harness its potential better to build the country’s first central bank-backed digital currency.

The implementation of a digital currency infrastructure requires significant investments. It is therefore imperative to secure stakeholder participation & commitment to ensure the success of this initiative further. Various stakeholders like banks, NBFCs, payment system operators, governments, policymakers, need to be mobilized to participate in the development of the CBDC infrastructure, fuel the demand and contribute to the digital transformation of the Indian economy. Implementation of CBDC will not be without initial as well as ongoing hiccups. Given that it’d be entirely digital, the currency can easily be exposed to the threats of cybercrimes and fraud. Cutting edge cybersecurity measures will need to be adopted to maximize security to customers without hampering the user experience.

The RBI has initiated a framework for setting up a new umbrella entity (NUE) along the lines of the NPCI to provide a massive fillip to the fintech ecosystem in India. In the future, NUEs will be tasked with developing and managing new payment methods and technologies, especially in the retail space. This will also ensure that NPCI which has been instrumental in implementing and governing of digital payment channels, will not become a single point of threat to attackers looking to exploit vulnerabilities in the system.

To further increase customer trust and build loyalty, the RBI has introduced initiatives like CSM (Complaint Management System), a grievance redressal process that will help customers lodge complaints against banks and NBFCs and safeguard their interests against financial frauds. The data captured on CMS will also help financial institutions reduce their complaint resolution time and improve their customer service. At the same time, there is a strong need for robust digital identity framework, privacy by design and regulation. The implementation of CBDC will be an important milestone in the journey of digital payment systems and will lead to the widespread adoption of digital payment solutions across the country providing an impetus to establish a truly cashless economy in the India of the future.

Views are personal. The author is EVP, Global Real-Time Payments, FIS.