CBDC - The Next Payments Disruption Like UPI?

Are central bank digital currencies the future of money? Find out how CBDCs could revolutionize the way we transact and store value

India's own Central Bank Digital Currency (CBDC) has been launched recently for pilot

It might be the next revolution in payments like UPI

What does it mean to you?

Here is all about the Indian CBDC 👇

1. What is CBDC?

   
   A CBDC is a digital version of a country's national currency, issued and backed by the central bank.
   
   CBDCs are designed to be used as a means of payment and store of value, similar to physical cash or bank deposits.
   
   They are created using blockchain or other digital ledger technology, and they can be accessed and used by individuals and businesses through digital wallets or other secure means.
   
   Just like a physical note, CBDC will be:

   1. Legal Tender;

   2. Liability of the RBI to return us that money;

   3. Our legal obligation to accept it;

   4. Freely convertible against commercial bank money

   
   Symbol: e₹
   

2. Features of CBDC?
   
   Apart from 1 above, CBDCs have the following features:
   

   1. No Banks Required: You won't need a bank account for transacting 🤯

   2. Cost of Issuance: Lower cost of issuance vis-a-vis notes. RBI in its note that initial set up of infra for CBDCs will be an investment, but there will be operational cost savings; 

   3. No Risk of Getting Torn: Negligible risk of being stolen or torn vis-a-vis notes

   4. Accessibility: CBDCs can be accessed and used by individuals and businesses through digital wallets or other secure means, such as mobile phones or biometric authentication

   5. Divisibility: CBDCs can be divided into smaller units, allowing for transactions of any amount

   6. Transferability: CBDCs can be easily transferred between different parties, without the need for intermediaries such as banks

   7. Immutability: CBDCs are designed in such a way that that transactions cannot be altered or deleted once they are recorded on the digital ledger

   8. Digital ledger technology: CBDCs are typically created using blockchain or other distributed ledger technology, which allows for secure and transparent record-keeping of transactions

3. How will it be different from UPI?

   
   CBDCs are digital versions of a country's national currency, issued and backed by the central bank
   
   They are intended to be used as a means of payment and store of value, just like physical cash or bank deposits
   
   In contrast, UPIs are payment systems that allow users to transfer money between different bank accounts using a single platform
   
   UPIs do not have a physical form and are not a type of currency, but they facilitate electronic transactions between different financial institutions
   
   Therefore, even after having UPI, CBDC will provide the following add-ons:

   1. No time required for settlement amongst banks

   2. No need of having a bank account. Hence, improving financial inclusion

   3. Substitute of cash

4. Need for CBDC

   1. Security over bank deposits :
      

      While our bank balances are insured up to ₹5Lakhs
      
      But since CBDC is CENTRALLY BACKED, it is the government's liability to return us each and every penny
      
      Well, that's what's in for us. What about the govt?
      
      Read on👇🏻
      

   2. Reduction in cost associated with physical cash management 

      
      Did you know Govt incurred ₹4,984.80 Cr. for just printing money

      
      CBDCs will help in reducing cost of:
      

      1. Printing

      2. Storage

      3. Transportation - 

      4. Reconciliation (and delay)

      5. Settlement
         
         And will be environment friendly too!
         

   3. No Settlement Risk

      
      In an online payments system, banks need to settle transactions amongst themselves - 

      
      CBDCs will eliminate this by giving choices to market participants to choose among various settlement options
      
      Payments using CBDCs are final and reduce settlement risk
      

   4. Improved Cross-Border Payments Scenario

      
      India is the world’s largest recipient of remittances as it received $87 billion in 2021.
      

      1. High costs

      2. Slow speed

      3. Limited access and

      4. Insufficient transparency
         
         are some challenges which CBDC will endeavour to solve
         

   5. Support Financial Inclusion
      
      Despite measures taken like 'Jan Dhan Yojana' and UPI, our score at the Financial Inclusion Index is quite low
      
      CBDCs will solve the problems like: - 

      1. Poor bank infra availability in remote areas,

      2. Poor connectivity etc.,
         

   6. Ensure end-use utilisation
      
      CBDC is programmable and hence, the trail of money can be tracked.
      
      It will be easy for govt to ensure that subsidy released has not been siphoned-off and has indeed been used for the purpose intended 
      

      For example, to track the subsidy for fertiliser is used for its purchase only
      

   7. Reduced Threats From Western Sanctions
      
      Countries keep their foreign reserves in US Dollars and Gold
      
      The West recently froze Russian assets held in such reserves
      
      CBDC will help us from such future sanctions

So, what do you think?

Will CBDC revolutionize the payments industry just like UPI did?

Or something at an ever bigger magnitude? Let us know in the comments :)

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