Central bank digital currencies: Reducing friction

Context:

RBI should carefully examine data on digital currencies to determine the way forward.

Global Trend in CBDC Development

• International Momentum: Nineteen G20 nations are in advanced stages of developing Central Bank Digital Currencies (CBDCs), marking a global shift toward digital currency.
• Pilot Projects and Launches: Twenty-one nations have launched CBDC pilot projects, with eleven having already introduced digital currencies, showcasing diverse modernization efforts in finance.
• India's Progressive Steps: The RBI joined the global trend by issuing a CBDC concept note and launched wholesale and retail pilot programs, demonstrating commitment to digital currency exploration in India.

RBI's CBDC Initiatives and Their Impact

• Pilot Expansion: RBI expands CBDC pilots to cities like Ahmedabad, Chandigarh, Guwahati, Hyderabad, Indore, and Kochi, gathering insights from diverse regions.
• Growing Retail Adoption: RBI's retail CBDC gains a million users, 2.6 lakh merchants, aiming for 10 lakh transactions per day, indicating rising popularity.
• Interoperability with UPI: RBI aims to enhance CBDC adoption by aligning it with the widely used Unified Payments Interface (UPI) infrastructure.

Benefits and Caution Surrounding CBDCs

• Operational Efficiency: CBDCs promise to reduce operational costs related to physical cash management, making financial transactions more efficient and cost-effective.
• Cross-Border Payment Improvements: CBDCs provide quick settlement, improving cross-border payments' cost-effectiveness and security, benefiting countries like India with significant remittance flows.
• Cautious Approach Required: CBDC's far-reaching impact on financial and monetary systems requires cautious progress. Thorough data analysis and prudent decision-making are crucial for success.