By Ishu Goyal (Ramjas College, Delhi University) | Edited by Ikshita Jain and Diva Sheth
In recent years, the Reserve Bank of India (RBI) has been exploring the use of central bank digital currencies (CBDCs) as a means of increasing financial inclusion in the country. With a population of over 1.4 billion and only 400 million adults owning a bank account, India has a significant unbanked population that could potentially benefit from the increased accessibility and security of CBDCs. However, the future of CBDCs in India is not without its challenges. The RBI will need to address several challenges, including consumer acceptance, security concerns, implications for the financial system, and regulatory and legal considerations, in order to fully realize the potential benefits of CBDCs while minimizing any negative impacts.
The Unified Payments Interface (UPI) is a “contactless” payment system that enables “frictionless” peer-to-peer (P2P) payments between bank accounts. UPI is built on top of existing mobile networks that enable individuals to transfer funds between their mobile phone-linked bank accounts using their phone number as the “address.” UPI thus enables cashless payments between any two entities within India, including non-bank entities like restaurants, caterers, petrol pumps, toll booths, and even cab aggregators. It is a secure and private system that does not require the user to share any sensitive data like their phone number or bank account details with anyone. Transactions can be done at any time of the day or night.
CBDCs have the potential to further increase financial inclusion in India by providing a secure and accessible means for individuals to access and use digital money. Unlike private digital currencies, CBDCs are issued and backed by a central bank, providing a higher level of trust and security for users. Additionally, CBDCs have the potential to reach underbanked populations that may not have access to traditional banking services, such as rural or low-income communities.
However, the implementation of CBDCs in India also brings with it a number of challenges. One major concern is the potential for CBDCs to compete with existing digital payment systems such as UPI. UPI has seen tremendous growth in recent years, with over 2 billion transactions taking place in December 2020 alone. The RBI will need to carefully consider how CBDCs will coexist with these established systems in order to maximize their potential benefits while minimizing any negative impacts.
Another challenge is the issue of security and regulatory concerns. CBDCs, like any digital currency, are vulnerable to hacking and other forms of cybercrime. The RBI will need to ensure that the necessary security measures are in place to protect users and their digital assets. Additionally, there are also regulatory concerns that need to be addressed, such as issues related to money laundering and terrorist financing.
Consumer Acceptance is also a major issue which The central bank must work towards overcoming the fear among the consumers that they might lose their access to cash. This will be difficult as the CBDC will be a digital version of the existing fiat currency. The fear might be eliminated only after a considerable period of time.
In order to fully understand the potential of CBDCs in India and address these challenges, it is important to examine the current state of financial inclusion in the country. Despite efforts to increase financial inclusion through initiatives such as the Pradhan Mantri Jan-Dhan Yojana and the Bharat Interface for Money (BHIM) app, a significant portion of the population remains unbanked. Factors such as lack of access to formal financial services, lack of digital literacy, and lack of trust in the financial system contribute to this issue.
CBDCs have the potential to address these challenges by providing a secure and accessible means for individuals to access and use digital money, enabling payments through mobile phones, and increasing digital literacy. However, it is essential for the Reserve Bank of India to not only consider how they will coexist with existing digital payment systems such as UPI but also address the various security and regulatory concerns that come with the implementation of any digital currency as discussed above.
One potential solution to address the concerns of coexistence with UPI could be to integrate CBDCs into the existing UPI infrastructure. This could allow for a seamless transition for users, as well as increased interoperability between different digital payment systems. Additionally, the RBI could also consider collaborating with other stakeholders in the ecosystem such as banks, fintech companies, and government bodies to develop a comprehensive strategy for the implementation of CBDCs in India.
In terms of security and regulatory concerns, the RBI could consider implementing a multi-layered security system for CBDCs that incorporates elements such as biometrics, encryption, and digital signatures. Additionally, the RBI could also work with relevant regulatory bodies to develop a clear legal framework for the use and operation of CBDCs in India.
One solution to overcome consumer fears of losing access to cash with the implementation of CBDCs could be to phase in the transition gradually. This could involve pilot programs in select regions or demographics, allowing consumers to become familiar with the new digital currency and its features before it is rolled out nationwide. Additionally, the RBI can also engage in extensive public education and awareness campaigns to educate consumers on the benefits and security measures of CBDCs.
In conclusion, CBDCs have the potential to increase financial inclusion in India by providing a secure and accessible means for individuals to access and use digital money. The Reserve Bank of India (RBI) will need to address several challenges, including consumer acceptance, security concerns, implications for the financial system, and regulatory and legal considerations, in order to fully realize the potential benefits of CBDCs while minimizing any negative impacts. The RBI could integrate CBDCs into UPI infrastructure, implement a multi-layered security system, work with regulatory bodies to develop a legal framework, and use a phased-in approach with pilot programs and public education campaigns to ease consumer concerns. That is through collaboration, research, and an effective implementation strategy, the RBI can successfully leverage CBDCs to further increase financial inclusion in India and provide greater access to formal financial services for Financially excluded populations.
Business news. (n.d.). Retrieved January 18, 2023, from https://m.economictimes.com/news/economy/policy/the-triumphant-upi-may-be-a-stumbling-block-to-digital-rupees-success/amp_articleshow/95909748.cms
Prasad, D. (2022, December 16). Difference between Central Bank Digital Currency (CBDC) and UPI. Retrieved January 18, 2023, from https://paytm.com/blog/digital-currency/difference-between-central-bank-digital-currency-cbdc-and-upi/#:~:text=A%20CBDC%20is%20a%20digital%20currency%20that%20can%20be%20used,payments%20using%20existing%20bank%20accounts.
Central Bank Digital Currency (CBDC) pilot launched by RBI in retail segment has components based on Blockchain technology. (n.d.). Retrieved January 18, 2023, from https://pib.gov.in/PressReleasePage.aspx?PRID=1882883
Seth, S. (2023, January 17). What is a Central Bank Digital Currency (CBDC)? Retrieved January 18, 2023, from https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
Priyadarshini, D., & Kar, S. (2021). Central bank digital currency (CBDC): critical issues and the Indian perspective. New Delhi: Delhi University Enclave, Sep.
Kumari, J. M. (2021). Central Bank Digital Currency (CBDC) Can it Replace Notes and Coins in India. Management, 8(S1), 21-28..
Ghosh, P. PROBLEMS AND PROSPECTS OF CENTRAL BANK DIGITAL CURRENCY IN INDIA. AN APPROACH TOWARDS CENTRAL BANK DIGITAL CURRENCY, 199.