Proposed digital currency by RBI to speed up transactions, reduce cost of cash: Deloitte

The proposed Central Bank Digital Currency (CBDC) to be issued by the Reserve Bank will play a critical role in improving the speed of transactions and reducing the cost of cash, a Deloitte report said on Wednesday.

The Reserve Bank of India is planning to come out with a central bank-backed digital currency, using blockchain technology in 2022-23.

As a financial services innovation, CBDCs are likely to play a pivotal role in shaping the 'future of value transfer', the report said, adding that most central banks worldwide are now in various stages of their evaluation of launching their national digital currencies.

"CBDCs due to its inherent potential of changing the way value transfer happens, provide a more resilient, innovative, and competitive payment system for households, businesses and economies," said Monish Shah, partner, Deloitte India.

Currently, most security clearing and settlement processes have a multi-day lag, he said, adding "with the introduction of Digital Rupee there would be a significant increase in efficiencies and reduction in associated reconciliation costs".

The report said CBDCs are likely to drive efficiencies and effectiveness of a jurisdiction's payments system by ensuring that its users access safe digital money. CBDCs will provide users with a sovereign option as compared to other less safe digital instruments, which may lead to less reliable payments, relatively volatile store of value and potentially erode monetary and financial stability.

"It may be especially important in the future as the use of cash declines and new forms of 'value transfer alternatives' become more widely used in the payment cycle," it said.

Globally, efforts taken towards the development of CBDCs by central banks are very dynamic, and with the COVID-19 pandemic, it is likely that the momentum behind these efforts will increase even further. Jurisdictions in APAC have been frontrunners in this space, with seven out of the top ten global CBDCs projects being conducted in the APAC region alone.

"While China was the first country to embark on its journey back in 2014, India has been the latest to initiate research around CBDCs," said the report titled 'Central Bank Digital Currencies: Building Block of the Future of Value Transfer'.

The report notes that in 2021, the RBI announced a phased implementation strategy for introducing a CBDC. The RBI has indicated that it will launch its first digital currency trial programme by the end of 2021.

The RBI, the report said, had been studying various aspects of introducing CBDCs, including security, impact on financial institutions, monetary policy and currency in circulation.

"It is expected that pilots will be conducted for both retail and corporate segments," the report said.

The report further said that as central banks embark upon their inevitable digital journey with CBDCs, it will lead to a paradigm shift in the way global and domestic economies operate and have significant implications on the commercial banks, their profitability as well as operations.

It also discusses various impacts of CBDCs on financial services players covering benefits from CBDCs, the need to maintain compliance, evolving infrastructure and interfaces, verify transactions, proactively prevent cyber threats, navigate tax changes and reorganise for change, among others.