CBDC: Convenience or Surveillance?

Central bank digital currency (CBDC) is conceived to counter Bitcoin. About 105 countries (95% of global GDP) actively pursue CBDC’s. India is launching the pilot for retail CBDC on December 1 in a closed group.  A broad criticism against CBDC is that the total state control tends to make it less attractive. Some even think CBDC could provide a handy tool for surveillance.  It remains to be seen if and how the concept catches up with the customers. 

The Union Finance Minister while responding to questions on Central Bank Digital Currency (CBDC) in Bangalore in April 2022 stated that CBDC represents many advantages in today’s fast paced world & that the Central Bank is actively working on implementation of CBDC in the country. (5)

What is Fiat Money?

A fiat money is a type of currency which is declared legal tender by a government but has no intrinsic or fixed value. Most of the modern paper currencies are fiat currencies, including the British pound, the Bangladeshi taka, the Japanese yen and similar other global currencies.

What is CBDC & need for CBDC?

The currency notes issued in digital form by the Central Bank of a country is the Central Bank Digital Currency (CBDC) of that nation (1). The Private digital currencies — crypto currencies — have been able to lure high net worth customers to invest in digital currency in the process attracting money launderers, which has put the fragile financial system at risk of possible money laundering and illicit financing risks. The drive towards rapid adoption of CBDC all around the world, is to formulate a framework of digital currency to work as legal tender, in the process replace the use of risky private  digital currencies.(2)

Advantages of CBDC

The domestic payment and settlement system would be greatly enhanced and would be faster with the usage of CBDC , leading to partial replacement of paper currency. CBDC would also serve as a fillip to hassle free cross border transactions when the majority of nations adopt and develop their respective CBDC’s. The CBDC would enable better compliance with tax and regulatory guidelines and would help integrate the informal economy with the formal one. Financial inclusion would be hastened with the rapid usage of CBDC. (3)

Risks of CBDC

The overall costs in the form of Operations, use of Technology, monitoring of compliance to guidelines  will drastically rise for the Central bank while it manages to increase the usage of CBDC among general public. There is the risk of low user adoption if the utility of CBDC is not discerned by consumers & merchants. There is the risk of data privacy and compromise of credentials as the CBDC transactions could be tracked and accounted for. A shift to CBDC might affect the intermediation function of banks as adoption of CBDC will affect the bank’s ability to multiply money and the banking companies operating cost would increase as staff have to be trained and primed to work in CBDC environment.

CBDC developments around the world

CBDC is in the process of being implemented in Bahamas. Nigeria has launched eNaira , in their country, in 2020 (2). China had started pilot use of its local  digital currency e-CNY in April 2020. Korea, Sweden, Jamaica, and Ukraine are other countries which are rapidly adopting CBDC in their respective nations.  In order to ensure broad acceptance, CBDC is to be made accessible to all groups of society, without barriers and in a secure way. (4)

Learners’ Opportunity     

Bringing about a mindset shift to accept the change is a daunting task for the leaders. ICFAI Online MBA can suggest the right solutions. For more details check our program @https://online.ifheindia.org/

Discussion Question        

What is your take, the government control on digital money is a boon or bane? Why?

Key Words

#onlinembainindia #onlinembaprogram #icfaimba #icfaionlinemba #onlinemba #onlinembadegree #mbadegreeonline #onlinembacourse

Source Article

1. Sagarika Chetty. (03/11/2022). Economic Times Article. Explained: What is CBDC, its utilisation and technology involved.
2. K Srinivasa Rao. (22/04/2022). Business Line – CBDC in India — the pros and the cons.

3. Rajeev Kumar. (01/11/2022). Financial Express – Digital Rupee: RBI’s Central Bank Digital Currency (CBDC) pilot starts – What should retail users know?

4. Burkhard Balz. (04/05/2022). Virtual European Payment conference- CBDC – The acceptance and adoption challenge Keynote speech at the virtual European Payments Conference

5. S Kalyanasundaram- (06/04/2022). Hindu Business Line- Is CBDC even needed? The RBI must not rush into its launch