Despite being in two minds over it, the Reserve Bank of India’s (RBI) is also working on a digital currency. While such a currency raises concerns over its impact on the financial system, it would certainly help in preventing frauds and creating transparency in the system.
RBI Governor Shaktikanta Das had said RBI is “very much in the game” and is getting ready to launch its own digital currency. “A central bank digital currency (CBDC) is work in progress. An RBI team is working on the technology side and procedural side, and how it will be launched and rolled out.”
How will the RBI currency look?
In a one-tier model, digital money would be transferred directly from the central bank via the social security system to a single person. That social security system would hold all the updated information of the persons. By this, digital payments would facilitate faster money transfer to people according to their updated information.
There can also be a two-tier model of digital money, which can be transferred by intermediaries, mostly banks, to a single person. This model is set to be adopted in China, and has also been proposed in the US and other countries.
One of the main features of China’s DCEP (Digital Currency Electronic Payment) is that it is exactly the same money, but in the digital form. It is to be transferred between users without an account and without a mobile linked to an Internet network. If a user’s mobile has a wallet, the digital currency can be transferred to another perform by placing two phones in physical contact i.e. via NFC. Introducing CBDC does not mean using only blockchain, as the current technology would not be able to handle volumes in China.
How will it prevent fraud?
A digital currency will make it possible for the central bank to keep track of the exact location and every unit of the currency, which will make tax evasion more difficult as one would not be able to hide financial activity. Such a currency would also make siphoning of money difficult. It is often difficult to trace the fund flow, as companies create layers between the source of the fund. However, a central bank digital currency would be traceable from the point of origin, making it very difficult to launder money, even there are multiple layers and circular transactions.
CBDC models
IUnder an account-based model, transactions can be approved by the originator and the beneficiary based on verification of the users’ identity, and the central bank can carry out the settlement. In the token-based model, transactions will be approved by the originator and beneficiary through a public-private key pair, and digital signatures. This system does not require access to the users’ identity, thereby allowing higher levels of privacy.
Banks worse off
The possible adverse impact of CBDC on bank funding, including the potential for destabilisation, has been a concern for central banks. Consumers could gain big if countries globally adopt central bank digital currencies because it would not only reduce costs and lower security breaches but also eliminate the need for having a bank account.
The processing of transactions in the future will not need credit cards, but only digital currency wallets, according to experts. Companies like Visa and MasterCard would be worst off because of the introduction of digital currency.
