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RBI's Current Efforts with CBDC; Will it be Even Better than UPI?


Due to the Covid-19 pandemic's effects, changing trading dynamics, and widespread technological improvements, traditional banking and financial systems are undergoing global transformation. The launch of the Central Bank Digital Currency, also known as CBDC, was announced by Nirmala Sitharaman, the current Union Budget Finance Minister. This fiscal year, the Reserve Bank of India (RBI) is considering seriously launching its own CBDC, which would first be limited to use by wholesale enterprises only. In light of this, the RBI proposed to the government in October 2021 that the RBI Act, 1934 be changed to broaden the term of banknotes to include money in digital form.

More than a hundred countries worldwide are working on developing CBDCs, which are in various stages. While some nations have already launched their digital currencies, others have given up or ceased working on their projects. The concept of CBDCs differs from decentralized virtual currencies and crypto assets, which are not created by the government and do not have the status of legal tender, despite being heavily influenced by bitcoins. The idea of CBDC is gaining traction as a result of the government's growing concerns about the risks associated with cryptocurrencies and their propensity to aid money laundering and other forms of illegal financing.

What CBDC Could be Capable of
India's existing monetary system is based on paper money, which is susceptible to deterioration and counterfeiting. This indicates that its manufacturing and distribution come at a high expense. Paper cash also has poor storage and transportation efficiency. This would also guarantee that India maintains its dominance in financial system innovation and does not lag behind other nations in adopting new technologies.

Furthermore, CBDC would promote broader inclusion by increasing access to financial services for people who are currently shut out of the established banking system. Over 1.2 billion Indians do not now have access to formal banking services. They consequently lose out on chances to preserve money and develop their financial stability. By giving customers a secure and practical means to keep and access money without going via a bank, a CBDC might take care of this issue.

This development will expand the number of people who have access to digital currencies, much like UPI did when it made digital cash more user-friendly

Many practical uses for CBDC, or the digital rupee, include programable payments for subsidies and speedier lending and payments by financial institutions.

Finally, CBDC may be able to lower the price of producing and dispersing paper money. Due to its digital nature, which makes it more secure and less expensive to generate, CBDC would reduce these costs. Also, banks charge large costs for some services, such foreign money transfers; however, if CBDCs were used instead of banks to conduct the transactions, these fees might be decreased or perhaps eliminated.

India-UAE MoU to Nurture the Development of CBDC
A Memorandum of Understanding (MoU) between the RBI and the Central Bank of the United Arab Emirates (CBUAE) was signed with the intention of fostering cooperation and fostering cooperative innovation in financial goods and services. According to this, the central banks of India and the UAE would work together to run pilot programs for CBDCs, or central bank digital currencies.

The two central banks will cooperate in cutting-edge FinTech areas under the terms of the Agreement, with a focus on CBDCs in particular. They will also look at the possibility of CBDCs issued by the CBUAE and RBI being compatible with one another.

The CBUAE and RBI will collaborate to undertake proof-of-concept (PoC) and pilot(s) of a bilateral CBDC bridge in order to promote cross-border remittance and trade transactions utilizing CBDCs.

It is anticipated that this bilateral testing of cross-border CBDC use cases will lower costs and boost the effectiveness of cross-border trade, thereby solidifying the economic links between India and the UAE.

Cross-border testing and the collaborative exploration of CBDCs are anticipated to strengthen the capabilities of both central banks by fostering the growth of an ecosystem.

The MoU also calls for technological cooperation and knowledge exchange on FinTech-related issues and financial goods and services. A significant step has been taken forward in FinTech innovation and cooperation with the RBI and CBUAE partnership.

The Indian government is attempting to issue CBDC, but there are drawbacks to this course of action.

Potential Risks that Come Along with the Development
The current financial system, which is already having to deal with high levels of non-performing loans, might be destroyed by CBDC. If CBDC is not effectively handled, there is also a chance that inflation will result.

Banks are concerned about the potential long-term consequences if the central bank assumes responsibility for storing and distributing digital currency, removing banks as an intermediary between customers and the RBI. This might cause deposits to drop, and if banks begin to lose deposits over time, it will restrict their capacity to issue credit. Moreover, banks' interest margins may come under pressure if they lose substantial sums of low-cost transaction deposits, which would increase the cost of borrowing.

Another issue is privacy concerns. Contrary to entirely anonymous cash, the majority of CBDCs will be designed so that the central banks can monitor the spending. Considering that the central bank will have access to a lot of data regarding user transactions, the heightened risk to user privacy should also be taken into consideration.

Much Better than UPI?
This development will expand the number of people who have access to digital currencies, much like UPI did when it made digital cash more user-friendly. The infrastructure that the government has supplied will help CBDC adoption grow, improve, and become more user-friendly.

The central bank reserves that the central bank holds will serve as the backing for the digital rupee, which will be issued by the RBI. The digital rupee will have certain distinctive characteristics while being similar to other online or virtual currencies. It will be made to increase financial inclusion and cut down on the cost of printing and distributing currency notes.

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