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Finance & Economy

CBDC in India : Current Stage

Central Bank Digital Currency (CBDC) is a digital form of currency note issued by Central Banks of different countries . It is a form of digital bank money that can be distinguished from reserves or settlement balances held by commercial banks with  RBI. It is a RBI liability, denominated in an existing unit of account, which serves both as a medium of exchange and  a store of value. Like cryptocurrencies, a CBDC exists only in a digital form such as file or a token, but unlike them, it is backed, controlled and maintained by the authority of RBI. Digital currency offers significant advantages, in the areas of financial inclusion and cross border payments, in addition to benefits such as smoother transactions and reduced costs compared to cost of managing physical cash. The RBI started its e-rupee pilot in December 2022 but transactions averaged only 25,000 a day by the end of October 2023, even though its use case was significantly broadened by linking it to the popular United Payments Interface (UPI),  However, from December 2023,  some large private and state-run banks  started increasing the use of CBDC, particularly for employee benefit schemes.  As a result transactions topped 1 million per day. Also, the user base has been steadily growing to about 4 million users currently, up from 3 million, 2 months ago .

Programmability is the most powerful feature of CBDC. This capability can be used to ensure that digital cash is issued as a targeted subsidy (say for fertilisers) and remain fixed for that purpose. The Reserve Bank of India prefers a centrally-controlled, conventional database infrastructures for CBDC  instead of DLT (distributed ledger technology)-based infrastructure due to the latter’s limitations. While both conventional and DLT-based infrastructures store data multiple times and in separate physical locations, the key difference is in how data is updated. In conventional databases, data is stored over multiple physical nodes, controlled by one authoritative central entity, which ensures better control . On the other hand, in DLT-based systems, the ledger is usually managed jointly by multiple entities in a decentralised manner and each update needs to be harmonised amongst the nodes of all entities. This consensus mechanism requires additional overhead owing to which DLTs enable lower volumes of transactions. Given the fact CBDC is yet to scale up and sustain the bigger scale, centralised databases make sense as of date. It may also be possible that some layers of the CBDC technology stack be on the centralised system and remaining be on distributed networks. The choice of technology architecture for CBDC will need to consider the resource intensiveness, energy efficiency, cyber security, technical stability and resilience, business continuity planning, and good  technical governance.

So, where do you think we are now, as far as CBDC is concerned? Do write to us.

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