Will CBDC become a double-edge sword for India?

Over the past few years, a lot of debate has gone around India’s Central Bank Digital Currency (CBDC), the e-Rupee or e₹. Globally as well, more countries are investigating the various benefits and drawbacks of CBDC.

For almost two years, the CBDC has been active in India in both the retail and wholesale sectors and witnessed growth to 5 million till June 2024 from 1.3 million a year ago. India is among 36 countries where CBDC is in a pilot stage. India, being technologically proficient and populous, has already seen the great promise of UPI, which directly suggests that the e₹ has various benefits here. 

Still, where there are advantages, there will also be difficulties. Let’s first look at the benefits the e-Rupee offers, even while we will also discuss the hazards and issues that demand cautious thought.

Possible advantages for India 

One of the definite goals of the CBDC in India is encouraging financial inclusion. Giving people living at far distances access to a digital currency enables them to participate in the official economy even without traditional banking services. Two probable results of this include lowering poverty and raising financial welfare. 

CBDC has multiple benefits such as reduction in cash dependencies, lower currency management cost, reduce transaction demand in deposits, as it helps in bringing down the settlement risks likewise decreasing the liquidity needs for transaction settlement.

In terms of simplifying systems of payments, efficiency can rise and transaction costs can drop as a result. This will be additionally helpful for customers, companies, and the government equally is simplifying payment processes. CBDC is intrinsically resistant to counterfeiting since it is digital and this helps to maintain the integrity of money and stop illegal activity. 

As far as application of monetary policy is concerned, CBDC could enable the central bank more authority over monetary policy in this regard. Furthermore, it can help to more effectively control inflation and provide focused liquidity injections. CBDC also offers the ability to streamline cross-border payments, therefore lowering the transaction costs and the time required. The outcome might be more commerce and foreign investment for India. Also, since CBDC leverages blockchain technology, it gains several advantages like decentralization, creation of smart and self-executing contracts and reduced point of failures, among others.

Given this background of why CBDC is crucial for our country, let’s now consider the difficulties involved with it.

Possible concerns and risks

One of the most important concerns related to CBDC in India is the possible effect it could have on personal privacy. The surveillance and recording of digital transactions create a possibility for government monitoring and data breaches. This could compromise both personal liberty and faith in the monetary system. 

CBDC systems run the danger of cybersecurity since they allow data theft and hacking. Should an attack be successful, it implies significant financial system instability and major economic losses. If such cases were to happen, the stability of the financial system would be in jeopardy. Globally, there are certain countries that mimic the digital currency scenarios similar to India, whereas they have been launched prior to India’s CBDC.

One of the notable examples of implementation of digital currency that hasn’t caught too much steam is Jamaica’s JAM-DEX, which launched at the end of July 2022. The financial inclusion objectives along with the promise of security in the digi-payment ecosystem haven’t applied enthusiastically in the population of nearly three million. 

Successful implementation of CBDC depends on a lot of technology infrastructure and knowledge, hence technological hurdles exist. Concerns surround whether India’s technology infrastructure and financial system could be able to manage the switchover without issues. The general CBDC use could lead to a decrease in the volume of cash transactions. Although this could have some benefits, those who lack knowledge of digital technology or who cannot access cellphones and internet connectivity could find it inaccessible as well.

The final word

Although CBDC in India has great potential to bring, it also has several risks and issues. The thorough assessment and the solutions of these issues are vitally required. As a nation, we must definitely adopt a comprehensive strategy considering the needs of many subgroups of the population as well as the possible dangers to the integrity of the financial system.

We should put strong cybersecurity first to guard CBDC systems against cyberattacks and create robust privacy rules and protections to defend personal data. The establishment of small-scale pilot projects to investigate CBDC’s viability and efficiency in various parts of India will further help in sharing with the public the advantages and drawbacks of CBDC, so as to build understanding and confidence. Finally, we should work with other countries to exchange knowledge and best practices in CBDC application.

India’s digital path is set at a point where, if we can properly manage these issues, it will be able to avoid the risks and yet gain the several advantages of CBDC.

(The author is Head- Global Processing, Financial Software and Systems)