So, what’s going to change?
Along with changing hands in transactions with cash, the change in possession of notes is simultaneously a record that the business has taken place. For a CBDC, the infrastructure operator has to update the record. The process of third party verification is needed to ensure that there is no fraud in the transfer of digital currency.
Verification has to be provided by a trusted party such as a clearing house or an intermediary so settlement risk can be mitigated and transactions can be verified instantly with a centralized verification authority approved by the central bank. The data centers to be developed will have to authenticate and issue certificates of user identity, manage the issuance, transfer and withdrawal of CBDCs, and control for risk with KYC and anti-money laundering management systems. Technically the use of cryptography can reduce the cost of verifying the authenticity of a digital currency as has been the case with bitcoin.
Quick settlement by RBI backed institution
Unlike CBDC, digital payment Like done through payment methods is i And raid It is necessary that every rupee transferred by this mode is backed by physical currency or at the disposal of banks transacting with the central bank. The advantage of digital currency is that it will be settled instantly as it will be transacted by a clearing house which is directly backed by the center and not by bank intermediaries, as in the case of UPI, where each bank has There is a separate UPI handler.
no bank account required
The advantage of not requiring the intermediate step of linking bank accounts with the online payment system makes CBDCs more efficient, but at the same time it allows the government greater visibility into real-time transactions.
Better regulatory controls to enhance user confidence
Verification of transactions through digital currency has a positive impact. This allays the fears of customers who would otherwise be opposed to holding many such digital currencies. The downside for individuals would be that unlike cash transactions, the central bank would have oversight and control of financial transactions.
RBI will have the ability to monitor and trace money transactions as well as refund or block them. The advantage of this is that it will make it easier to identify financial crimes such as tax evasion, terrorism financing and illegal goods sales. However, that advantage must be offset with the consequences of exposure to cyber risks, which require central banks to invest in skill sets they do not yet have.
Evolution of the ecosystem with partners
Central banks, including the RBI, have realized the need to understand fintech innovations and associated risks and have developed facilitators to test these innovations in a controlled risk environment. For example, the RBI has a regulatory sandbox, but had indicated that initial coin offerings and cryptocurrency services will not be accepted for testing, as part of the negative list, for private entities. The central bank will not have the technical capability to develop a new e-money system and will have to acquire the technology or partner with a private company, developing some of the know-how internally. The responsibility of security of information and settlement of transactions rests with the central bank. The central bank should conduct pilot programs to test the convenience of processes, system stability and controllability of cyber risks.
Learning from the past to avoid messes in full-scale roll-out
Just last year we saw that new e-filing income tax portal was launched which had issues like inability to generate OTP for Aadhaar verification, failure to link old data of previous income tax return, wrong capturing of details from Form 16. Other problems in filing income tax return. A technical glitch by the RBI for a sovereign function like digital currency would undermine confidence in the financial system and lead to financial instability.
Hybrid model of online and offline transactions
Mostly it will happen that individuals will use software wallet through mobile payment app and hardware wallet through mobile phone. It is also possible to make CBDC payments through integrated chip cards. This would be desirable in a country that is susceptible to power shortages and inadequate internet connections. Alternatively, offline transactions can be enabled by allowing two phones close to each other to perform the transaction as the central bank will have access to the transaction data and reverse the transaction once the offline transaction is received for verification. could.
Promoting Financial Inclusion on DBT Delivery
In theory, those who do not have bank accounts can avail financial services through digital currency wallets. By which unbanked families can be included financially. Subsidies can be released directly to citizens. Its attractiveness must be weighed carefully because once digital payments do not require a connection to a bank account, there are risks to financial stability as capital moves to and from banks and digital platforms.
The government should ensure security before implementing
We should be aware that CBDCs are traceable, unlike cash which is anonymous. The central bank should set up infrastructure that records and settles transactions that open it to cyber risks. There are risks to financial stability. Financial inclusion has its allure, but it should not be the driving force for CBDCs as there are other ways to pursue that objective through other payment mechanisms.
(The author is Professor of Economics and Director, IIM Ahmedabad.)