Page 51 - Banking Finance February 2022

FEATURE

apps that are already in place in India and all across the The NPCI is majorly owned by public sector banks but, given
world. How is CBDC different then? For one, the payment that it was formed on the initiative of RBI, it is safe to say
infrastructure is created and managed by the central bank. that the government has some control over it. Also, the
Two, payments are made using central bank money and not stake of each individual private company in NPCI is limited
the money created by the banking system. to a few percentage points.

But why do we need a central bank issued CBDC, especially UPI has proved to be a gamechanger in the digital payments
given how the market is already saturated with fintech space. Money can now be instantly transferred between
innovations? Let’s try understanding this through the two bank accounts using a mobile phone. In October, 4.21
examples of Sweden and China. Data from Riksbank, the billion transactions happened through it.
Swedish central bank, shows that between 2010 and 2020,
the percentage of people who paid in cash for their last In that sense, the presence of UPI has ensured that India
purchase has decreased from 39% to 9%. Also, a bulk of this won’t go the Chinese or the Swedish way, where a few
new digital payment infrastructure is managed by a few private firms might monopolise the digital payment system.
private companies.
But despite this advantage, there are two reasons why India
China has gone the same way. As D Priyadarshini and may still push ahead to create a well-functioning CBDC
Sabyasachi Kar point out in a working paper titled Central system. One is the complicated cross-border payments
Bank Digital Currency: Critical Issues and the Indian system as it prevails. As Prasad writes: “They involve
Perspective: “China, for example, has seen near universal multiple currencies, must often be routed through several
adoption of digital payments, with nearly 94% of mobile institutions, and need to be consistent with country-specific
transactions supported by Tencent or Alibaba. Both entities financial regulations. The net result of such impediments is
have also combined several other financial services with that cross-border payments have often been slow, expensive,
their social media apps." and difficult to track."

This kind of integration increases the overall risk in the A CBDC could handle these issues well. As RBI’s Shankar puts
financial system, with the entire digital payment it: “It is conceivable for an Indian importer to pay its
infrastructure being dependent on a few private companies. American exporter on a real time basis in digital dollars
As Priyadarshini and Kar write, this poses risks “of without the need of an intermediary. This transaction would
monopolies, high entry barriers, potential misuse of data, be final, as if cash dollars are handed over." Of course, for
safety and security of technology". this to happen, India needs to have a sovereign-backed CBDC
that “will be trusted in a global system".
Thus, there is a need for central banks to create a new
digital payment infrastructure through CBDCs. The Riksbank, The other reason lies in the fact that China is betting big on
which has been experimenting with the e-krona, states that its CBDC. In fact, China wants the digital yuan to play the
“in the event of serious shocks to the systems of the banks same role in the international economy that the US dollar
or card companies, an e-krona could be an alternative form does today. Hence, and as Priyadarshini and Kar put it, “once
of payment". Other than this, in China, the Chinese the digital Yuan gains acceptability as a global currency, it
Communist Party is also compelled to put breaks on the is a matter of time before these will start flowing into the
proliferating clout of the private sector. Indian economy".

The Indian context Given the contentious relationship India shares with China,
In India, the Unified Payments Interface (UPI) has been very it needs to work towards limiting this possibility, which will
successful in the digital payments space. It’s run by the be possible only through the development of global protocols
National Payments Corporation of India (NPCI), an umbrella for the cross-border usage of CBDCs and “in order to have
organization for operating retail payments and settlement a say in the development of these international standards…
systems, which is an initiative of the RBI and Indian Banks’ it will be very useful for India to have a credible and working
Association (IBA). CBDC".

BANKING FINANCE | FEBRUARY | 2022 | 51