Opinion Express View on central bank digital currencies: Reducing friction

Across the world, central banks are examining the prospects of issuing digital currencies. As per the Atlantic Council, 19 of the G20 countries are now in advanced stages of development of CBDCs (central bank digital currencies). Twenty-one countries have launched pilot projects, while 11 countries have introduced a digital currency. The Reserve Bank of India has also been taking tentative steps towards that end. In October 2022, it issued a concept note on central bank digital currencies. Subsequently, it launched pilots of CBDCs in both the wholesale and retail segments. The pilot in the wholesale segment involved the settlement of secondary market transactions in government securities, while that in the retail segment was launched with a closed user group covering select locations. On Monday, RBI Governor Shaktikanta Das, while speaking at the G20 TechSprint finale, said that the central bank is “slowly and steadily expanding the CBDC pilots to more banks, cities, people and use cases.”

As per the RBI’s annual report, cities such as Ahmedabad, Chandigarh, Guwahati, Hyderabad, Indore and Kochi are being added to the pilot in phases. The adoption of the retail CBDC has also been gaining traction. As per reports, it has crossed over a million users and 2.6 lakh merchants. The central bank is aiming for 10 lakh CBDC transactions per day by the end of this year. Considering the widespread usage of the UPI architecture — in July, 9.96 billion transactions were routed through it — interoperability with this payment system could help trigger widespread adoption.

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Several benefits could accrue from CBDCs. Along with bringing down the operational costs associated with physical cash management, it could also make the inter-bank market more efficient. Further, as Das also pointed out, CBDCs can help make cross-border payments “cheaper, faster and more secure” with their instant settlement features. Considering that India is a big recipient of remittances this could lower the costs and frictions associated with these transactions, bringing in wider benefits. However, considering the wide-ranging implications that CBDCs could have on the financial and monetary system, the central bank must proceed with caution. It must rigorously examine the empirical data that it is generating, and use it carefully to determine how to proceed forward.