The world is moving towards digitization in almost every field. Banking and finance are no exception to that digitization. Central Bank Digital Currency is the newly emerging concept of digitization of money. It is an attempt to properly regulate the money and bring all citizens into a process of inclusion. It can be taken as an alternative to cryptocurrency.
CBDCs are the virtual form of fiat money and attempt security, ease, and convenience of transactions. Like the fiat money, CBDCs will have full government support, and the difference between the two will be digital and physical form. It will completely digitize the monetary system.
The process of digitization of money and CBDCs is taking root across the world. As of November 2021, 17 countries are piloting it, and 7 have fully launched it. Eighty-seven governments are exploring the opportunities of CBDCs that they can benefit from.
CBDCs and their benefits
Central Bank Digital Currency is an innovative solution to tackle the problem of global payment issues. It uses the blockchain system’s idea to keep money in virtual form. The primary regulator of the process is the central bank of the country. This bank regulates and distributes this money like fiat money. This money can be used to purchase, transfer, and other monetary uses like fiat money. Some of the benefits of CBDCs are given as follows.
- The main pro of CBDCs is automation. It makes the regulation and check of money easier for governments and banks.
- It reduces the effort and involvement of the third party.
- It directly connects the central bank and the consumer.
- It takes care of the privacy of the consumer, and the transactions are kept pseudonymous.
- It can be used for the prevention of illegal activities. The central bank can check the transactions, and its tracking makes the process easy for LEAs.
- It helps the inclusion of those who have no access to banks.
- If any country pilots the project or completely implements it, they can benefit from the pros, as mentioned earlier of CBDCs.
Countries piloting CBDCs
According to the Atlantic Council, 87 countries (representing more than 90% of global GDP) are researching a CBDC, and seven have launched one. Comparatively, in May 2020, only 35 countries were considering developing a CBDC.
There is a total of 17 countries where the CBDCs are undergoing pilot projects. These include South Korea, Nigeria, Ghana, France, Tunisia, Singapore, Jamaica, South Africa, China, Canada, UAE, Uruguay, Singapore, etc.
Other countries have not yet piloted CBDCs but are at some level of development. They intend to launch their pilot project soon. Two of these are discussed here.
India is a new addition to the run of pilot CBDCs. Reserve Bank of India’s senior official from the Department of Payment and Settlement, P. Vasudevan, disclosed that RBI would be driving the project of CBDCs in the next fiscal year, i.e., April 2022-March 2023. According to other sources, the process is underway to check the feasibility and complete the homework to launch the process.
It will attempt to reach those who can’t access government banks, as previously happened during the Covid pandemic. The coin of India’s CBDC would be Indian Rupee. However, the officials had said earlier that it would be launched in December, but officially no confirmed date has been announced.
It is considering various options like if this digital money should be semi-centralized or decentralized. It will begin the legal process for the CBDCs by presenting a bill in the parliament in session starting from 29th November.
It will be a trial looking at the feasibility and the possible impacts of this project on the central bank. The reason for the delay is a complete analysis of the situation and its potential implications on RBI. The official also disclosed there had been no final decision if it would be a retail CBDC or wholesale CBDC. There has been no final decision about the mechanism for this pilot project. It will look into the concerns of stakeholders and possible risks.
Peru is another country that has decided to launch the pilot project for CBDCs. It will launch this project in collaboration with Singapore, Hong Kong, and India. This project aims at the development of a digital currency for the Central Reserve Bank of Peru. This news was disclosed by the president of the Central Reserve Bank of Peru. He said that though Peru can’t afford the risks and costs of developing a digital currency, it can’t stay behind in this race.
The result of the adoption of digital currencies in Latin America is that Peru has taken this step. The leading names in this regard in the region are Mexico and Brazil. These two countries have planned to implement CBDCs till 2023. It is because of Covid 19 that many countries have begun to work on CBDCs. It will not only help tackle many challenges but will open up new opportunities.
If this project is completed successfully, it will open new ways for Peru to innovate its financial system. Though the pilot project will soon be underway in Peru, their representative has told the press that they will not be in the position to implement it thoroughly. Peru’s Central Bank President has indicated that it will collaborate with India, Singapore, and Hong Kong to develop its own central bank digital currency.
We don’t want to fall behind. We are at least at the same level or maybe even further ahead than similarly-sized countries, although behind Mexico and Brazil.Julio Velarde, President, Central Reserve Bank of Peru