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Explained: Why central bank digital currency glitches hold lessons for India, others

There are at least nine countries or currency unions that have launched digital currencies. The RBI is expected to launch its own one in the upcoming financial year. What is the need for it? What are the glitches being faced?

Written by Pranav Mukul , Edited by Explained Desk | New Delhi |
Updated: February 24, 2022 7:26:25 am
CBDC is a legal tender issued by a central bank in a digital form.

Some of initial digital currency experiments globally are running into hurdles and may serve as lessons for the Reserve Bank of India, which plans to launch its own central bank digital currency (CBDC) next fiscal.

Recently, a digital currency that is being used by seven Carribean nations experienced glitches that have kept it offline for more than a month.

What is a CBDC and what is the need for it?

CBDC is a legal tender issued by a central bank in a digital form. It is similar to a fiat currency issued in paper and is interchangeable with any other fiat currency. The RBI is expected to launch the CBDC from the upcoming financial year. This follows the government’s plans to launch the CBDC that will be backed by blockchain technology.

According to Investopedia, the goal of CBDCs is to provide users with convenience and security of digital as well as the regulated, reserve-backed circulation of the traditional banking system.

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Which countries have launched their CBDCs or plan to do so?

According to the Atlantic Council’s CBDC tracker, nine countries or currency unions have launched their digital currencies, while 15 are in the pilot phase. Additionally, 16, including India, are in the development stage, and 40 are in the research stage. Seven are inactive and two have cancelled any plans to launch it.

Among the nine that have launched it is the Bahamas, the seven Carribean nations and Nigeria. Those piloting include South Africa, Saudi Arabia, the UAE, China, Russia, Sweden, Malaysia, Singapore and Thailand.

The Bahamas launched the world’s first CBDC in October 2020 called the “Sand Dollar”.

China introduced the e-CNY, the digital form of the Chinese yuan, at the Winter Olympics in Beijing. It was reportedly being used to make over 2 million yuan of payments per day. Reuters reported last week that the latest trial was notable for the number of people attending the Games, and that athletes, coaches and media from around the world could use it via smartphone apps, physical payment cards or wristbands.

What are the glitches being faced?

Citing bank officials, Bloomberg reported that the digital version of the East Carribean dollar — DCash — has been offline for over a month and could take several more days to get restored. The report quoted Josh Lipsky, director of Atlantic Council’s GeoEconomics Centre as saying: “This is an important case study in things that can go wrong in the rollout and expansion of a digital currency… Every country trying do a large rollout has had problems”.

The occurrence of such glitches has made financial sector experts call for central banks to make necessary preparations to allow enough leeway to banks and other stakeholders in the financial services ecosystem to make their systems ready to deal with digital currencies and develop solutions to problems as they develop.

Are countries facing other problems in adopting digital currencies?

The Central American nation of El Salvador last year adopted Bitcoin as a legal tender alongside the US dollar, and in addition to facing technical glitches on its Chivo payment platform that was to be used for making transactions, the country also ran into macroeconomic problems with the volatility of the Bitcoin. The Chivo system also reportedly failed to prevent identity fraud, leading to unscrupulous use of the $30 sign-up bonus being offered to users.

But the fiscal deficit problems that El Salvador’s President Nayib Bukele hoped to resolve with use of Bitcoin as legal tender remained even after the move. To fund the deficit spending, Bukele had asked for $1 billion in loans from the International Monetary Fund but the agency refused to lend the money, raising concerns about the country’s Bitcoin scheme.

The volatility and the speculative nature of private cryptocurrencies like Bitcoin, Ether, etc is what is pushing many central banks across the world to adopt their own digital currencies.

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Where does India’s plan stand?

During the Budget Speech, Finance Minister Nirmala Sitharaman announced that RBI would launch the CBDC in the upcoming fiscal. While the RBI is still working on the finalities, it is understood that the CBDC will be based on Blockchain technology. Prime Minister Narendra Modi has said that with the launch of the revamped digital version of the Indian rupee, people could convert digital currency to physical currency and vice-versa with ease, and this will strengthen India’s digital economy and ecosystem. Digital payments and online transfer of funds will be more secure with the launch of CBDC, he said, adding this will also streamline the global digital payment system.

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