CBDC codes contain fiat currency. They can be programmed for specific use-cases and leveraged for the delivery of government benefits and financial inclusion, to address concerns about inclusion errors, and to combat money laundering and terrorist financing. Regulation can be strengthened for They can aid in the seamless transmission of monetary policy decisions, reduce dependence on the US dollar as a globally accepted means of payment, and reduce printing and transportation costs associated with paper currency.
These innovations can take banks and other gatekeepers out of the equation into the formal financial ecosystem and remove the need to go through inappropriate KYC and cumbersome onboarding processes. Discretion and risks associated with human interfaces will give way to automated transactions based on smart contracts. This would dramatically reduce exclusion risks, making it more efficient and equitable, without eliminating the benefits associated with the formal financial system.
However, when proponents of CBDCs suggest that they offer everything that the cryptocurrency can, and thus imply that there is no need for the latter, they push the envelope. It is like saying that it would have been enough if the internet or email were limited to the US government or offered to their citizens by centralized government agencies of various countries. While such systems can provide governments with control and security, unlike cryptocurrencies, they fail to take advantage of the potential of global, open-source, real-time, interoperable peer-to-peer systems with a single point of failure. point does not occur.
Cryptocurrencies are global and unrestrained by geographic boundaries. A centrally backed digital rupee could enable Lakdong turmeric growers in Meghalaya, saree weavers in Chanderi and shirt makers in Tiruppur to receive instant real-time payments from their customers anywhere in the country. cryptocurrencies like BitcoinHowever, it could enable them to receive real-time payments from customers in the United States, the European Union and Australia at a lower cost and risk. Round the clock access to the global payments ecosystem is likely to open up a range of opportunities.
Furthermore, cryptocurrencies are open-source, just like the Internet. The Internet is the tech-infrastructure layer on top of which many applications ranging from email to chat services and e-commerce to digital payments are built. Similarly, blockchain is a techno-infrastructure powered by a native cryptocurrency, and thousands of applications can be built on top of this infrastructure layer. These applications can range from governance and health to building construction. CBDC Application itself. While CBDCs are meant to be used as a means of exchange, most of the 8,000 cryptocurrencies available today are not for that purpose. At their core, cryptocurrencies are a technology with multiple use cases. And, therefore, they are conducive to innovation in a way that closed-systems, as most CBDCs would likely, would not allow.
Governments are increasingly warming to the idea of ​​regulating cryptocurrencies. While this is a welcome step in the right direction, the current regulatory framework does not do justice to the potential of cryptocurrencies, particularly the ability to democratize finance. As the world moves from collateral to cash flows and alternative data-based lending, the transformative impact of lenders across all jurisdictions offering credit in cryptocurrency based on global payment data could be truly incredible. Similarly, imagine the effect that blockchain Open-source decentralized financial services (known as DeFi), including savings, investments, credit, trading, etc., may be aimed at traditionally excluded groups, such as women, low-income individuals and persons with disabilities.
Cryptocurrency can also be beneficial to CBDC systems, helping a digital rupee and digital krona to inter-operate through a cryptocurrency that is designed to operate alongside both. Digital Rupee will convert first into cryptocurrency and then into digital krona. Such innovation will happen faster with private cryptocurrencies than with centralized CBDCs.
Similarly, a cyber attack on Bangladesh’s central bank a few years ago could have detrimental effects on CBDCs. Conversely, the absence of a centralized issuer and manager of cryptocurrencies will aid in better management of cyber security risks and avoid a single point of failure.
Any broad-brush regulation without understanding the specifics of cryptocurrency can do more harm than good. A pre-cost-benefit analysis of the proposed regulations and adoption of a risk-based approach would be necessary to avoid such unintended adverse consequences.
Central banks should not fear the rise of cryptocurrencies. CBDCs and cryptocurrencies have many different use cases, and the two have immense potential to coexist and grow. Obviously, there are some areas of overlap in which competition would be good to benefit users.
Rastogi is the founding partner, Ikigai Law (representing crypto-exchanges before the Supreme Court reserve Bank of India Crypto-Ban) and Kulkarni is the Director of Research at CUTS International (consumer-facing policy research and advocacy group).