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India’s CBDC Pilot Project: A Threat or a Support System for UPI?

Key Takeaways

  • On 1 November 2021, India started its CBDC Pilot Project in the wholesale market for secondary trade in government securities

  • Central Bank Digital Currencies or CBDCs are the cryptographic tokens issued by the central bank of a nation and pegged to its fiat currency

  • The perks of blockchain technology can facilitate the development of instant retail payment systems and open payment platforms that are compatible with CBDCs

  • CBDCs are going to exist in the same financial ecosystem as that of the other technologies and supplement their growth through different means.



03 Nov 2022 By : Anirudh
Southeast Asia’s Lar

A few years back when cryptocurrencies were searching for ground in the financial world, nobody ever thought that it is going to become the backbone of internet trade. Cryptocurrencies are becoming the foundation of the forthcoming fintech in the industry and enabling different governing authorities to embrace the change for a better future.

India’s Central Bank Digital Currency is a step towards digitizing the national economy. On 1 November 2021, India started its CBDC Pilot Project in the wholesale market for secondary trade in government securities. This step from the government is being welcomed by the global crypto community and investors are hopeful about the future of crypto in the nation. 

However, a significant doubt about the impacts of CBDC on UPI adoption is rising in the mind of common Indians. In this CoinGabbar blog, we are going to explore India’s remarkable leap in the blockchain space and discuss how CBDCs are going to affect the UPI ecosystem of the nation. 

What is CBDC?

Central Bank Digital Currencies or CBDCs are the cryptographic tokens issued by the central regulatory authority such as the central bank of a nation. CBDCs are pegged to the value of the fiat currency of a nation and facilitate better implementation of national fiscal policies. 

CBDCs can make it easier for the government to maintain a clear and immutable record of money in the financial ecosystem. These cryptocurrencies can drive the rate of digital financial inclusion in the nation without the government compromising on control. However, these cryptocurrencies do not provide you with the same level of privacy as they are controlled by a central authority.

Why India is Testing its CBDCs? 

India is one of the few countries in the world that has launched its CBDCs and there are evident reasons to support the decision. India’s stand has been extremely positive towards blockchain technology and its adoption of innovative solutions. But at the same time, we had witnessed a sense of hesitancy in accepting cryptocurrencies in general. 

After putting much thought, India has finally started its CBDC testing, and here are some of the main reasons behind that: 

No Need for Interbank Settlements

CBDCs work on a blockchain network and transactions happening on the chain do not require any intermediaries in between. The role of banks in a traditional transaction is to complete it by conducting interbank settlements. However, blockchain cut down the need for banks, making transactions much smoother and faster to execute along with zero server downtime.

Smoother and Cheaper International Transactions

Conducting international transactions from India is not cheap due to the heavy commissions from banks on both sides. International bank settlements also take time leading the transactions to take even days before being finally settled. 

India’s CBDCs present effective solutions to this by cutting down commissions and enabling almost instant transactions over the blockchain network. CBDC adoption will make international transactions cheaper and easier to conduct with almost zero risk of third-party intrusion.

Reduced Cost of Printing, Storage, and Transportation

Printing and storing fiat currency is no easy job for central authorities. Printing an Rs. 100 note can cost as much as Rs. 15-17 and that sums up to a huge cost for the government. On the contrary, CBDCs do not comes up with the cost of printing and the need to have physical storage and security.  

They do not have to be transported to the banks like fiat notes and thus save on the transportation cost as well. This can also be seen as a move towards a green economy as it will reduce the carbon emission involved in the process. 

A Dent on Black Market and Counterfeit Currency

Black markets and hoarding of banknotes have been significant problems that the government has to face with fiat. Apart from that, counterfeit currencies are also a bone of contention for the regulatory authorities and CBDCs could be an effective solution to all these problems. CBDCs cannot be faked or hoarded without the government’s knowledge. 

Traceable

Digital currencies and especially centrally regulated blockchain transactions are going to be completely traceable by the national probing agencies, making criminal investigation much more effective. This can choke the attempts for terror funding which has been one of the biggest reasons for the government’s hesitation in promoting crypto in India.

Money in Circulation

India has over Rs. 28 trillion worth of banknotes in supply as of March 2021 and the sheer volume of fiat currency is a challenge for the right fiscal policy implementation in the nation. Government has a clear intent of reducing the total supply of fiat currency in the economy, making the system more transparent, accountable, and taxable. 

The steps towards the same are being taken by the government and as per sources Rs. 2000 notes are being drawn for the market. As per statistics, the total supply of Rs. 2000 has been reduced from ₹6,58,199 crore to ₹4,90,195 crore in the last couple of years only. 

Implementing CBDCs and promoting the Digital India initiative is a measure towards monitoring the movement of money in the economy and reducing the need for fiat currency.

How CBDCs are Going to Affect the Retail Transactions in India?

Central Bank Digital Currencies are presently in the testing stage but we are expecting them to hit the market for retail users without much delay. CBDCs can be revolutionizing retail transactions as blockchain can enable instantaneous transactions. The perks of blockchain technology can facilitate the development of instant retail payment systems and open payment platforms that are compatible with CBDCs. 

The testing phase of Indian CBDCs will allow the central authorities to understand the pros and cons of retail crypto transactions and whether they are more effective than the present UPI payment system which has been embraced by the common Indian with utter zeal, especially in the post-Covid world order.

Will CBDCs be going to Challenged the UPI Adoption?

A Unified Payment Interface or UPI is a real-time payment system that is developed indigenously by the National Payments Corporation of India. UPI is an extremely popular mode of payment for conducting retail financial transactions in India and has become the backbone of India’s digital economy movement. 

One can get an idea of its popularity from the fact that over $6.6 billion worth of money has been transferred using UPI in only August 2022. The UPI has been a remarkable innovation that has pulled out India from a completely fiat-dependent economy to a major global player in electronic payment innovation. 

UPI has still a lot to cover in India and that is why the introduction of CBDCs is being seen as a challenge to India’s successful digital payment method. 

However, the CBDC’s concept note from RBI has made it clear that CBDCs are not going to replace either UPI or any other digital mode of the transaction including cryptocurrencies. CBDCs are going to exist in the same financial ecosystem as that of the other technologies and supplement their growth through different means.

Conclusion

Blockchain is a technology being embraced by different industries to incite transparency, accuracy, and effectiveness in their operation. It is inevitable for governments across the world to ignore its significance and delay its integration into the financial ecosystem. Indian government understands this and had made the first step towards a new-age digital financial ecosystem. 

However, it will be interesting to see the impacts of CBDCs on the retail trade of the nation. Indians have adopted UPI but will they be moved to CBDCs with the same level of confidence and agility? We at CoinGabbar appreciate the efforts that India is putting in to align the national financial ecosystem with global needs without compromising on fiscal control.

What according to you is the biggest benefit of using CBDCs? Share your views in the comments down below and get a chance to feature on our social media handles.



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