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Potential Impacts of CBDC

Many Indian banks fear CBDC as it could disintermediate them.

Central Bank Digital Currency (CBDC) is a form of digital currency which is issued by the Central Bank of a country. It is the sovereign digital currency of a state.

The idea became a prominent idea when the world saw the success of cryptocurrencies.

CBDC is usually seen as a response to the proliferation of crypto.

It has many potential impacts.

For instance, it would lead to better tracking of money in circulation which would lead to the loss of pseudonymity offered by crypto and the anonymity offered by cash. Along with that, the seigniorage would be higher.

However, it is not clear whether CBDC would cater to the wholesale segment or the retail segment. According to a report by Economic Times, banks are fearing that a retail CBDC would reduce the disintermediation of the banks as they would be removed as the link between the Reserve Bank of India (RBI) and citizens.

This would result in a drop in deposits, disruption in the debt market, reduction in credit creation and impact on lending rates due to the retail CBDC.

That’s why banks are recommending wholesale CBDC.

Another drawback of a CBDC would be that it will be prone to cyberattacks. It will not be able to reap the security benefits of a Decentralized Network. CBDC in India may be hosted on a blockchain, but it would still not be as decentralized as a mainstream cryptocurrency as Bitcoin or Ethereum.

At the moment crypto investors make use of stablecoins to shield themselves from the volatility of the market. Many see CBDC could replace stablecoins. But stablecoins are hosted on a decentralized blockchain, whereas CBDC will be hosted on a centralized network with a different blockchain. The latter is not expected to support interoperability. But there could be stablecoins backed with CBDC. 

Many believe the CBDC will be able to replace crypto. It may not happen as loyal crypto investors will keep investing their money into crypto assets to hedge it against inflation. CBDC does not present an alternative investment offering. It is just the digital representation of fiat currency. 

Plus, it does not support the numerous other innovations brought by virtual cryptocurrencies such as Play-to-Earn, Decentralized Exchange (DEX), Non-Fungible Tokens (NFT), etc.

Money has taken different forms throughout history from metal to paper. Now it has taken the digital form. India is planning to roll out its CBDC in the coming financial year.

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