Page 34 - Banking Finance October 2025

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Emergence of

CBDCs in the

Global Financial

Market Chief Manager (Retired)
Sanjay M. Nafde

State Bank of India
Freelance Writer

A fully functional CBDC has never been implemented anywhere, partly because of technological
handicaps. Hence, given the absence of empirical data, it is difficult to estimate the true costs
associated with such a transition. Gauging the efficacy of monetary policy under such conditions
is another big challenge.

T he global financial landscape has recently under- Which ultimately has led to an increase in the demand of a
gone significant transformations, with a notable
digital currency. A technological revolution is underway with
focus on Central Bank Digital Currencies (CBDCs),
often dubbed as digital counterparts to traditional curren- the rise of blockchain and the simultaneous development
of crypto currencies and mobile payment systems. Virtual
cies. This concept has garnered international interest, lead- cash is seen as a double-edged sword, mainly because of
ing to discussions on technical feasibility, design consider- its fundamentally transnational character. It holds promise
ations, reasons for issuance, and implications associated as there are efficiency gains to be had in terms of tapping
with CBDCs. The Bank of International Settlements (BIS) unexplored commerce and investment avenues.
defines CBDCs as "a digital form of central bank money that
is different from balances in traditional reserve or settle- Monetary and financial transactions could be boosted by
ment accounts" (Central bank digital currencies, 2018). the ease of access and the sheer resilience of the technol-
ogy. The transition also presents enormous potential in the
After a long history of fiat money, from shells to gold to sphere of policy. Governments have been grappling with
paper currency, CBDCs stand next in line in this evolution; issues like financial data security, tax evasion and money
CBDCs are a potentially new form of fiat money that could laundering, and the likelihood of disturbances in money sup-
revolutionize the way we use money since it is distinct from ply and exchange rates. In the Indian context, the currency
physical cash or reserve/settlement accounts. in circulation has more than doubled from Rs 13.35 lakh
crore in March 2017 to Rs 35.15 lakh crore in March 2024.
The landscape of payments is changing rapidly. In recent The currency in circulation has happened despite the cen-
years, many proposals for digital money have appeared to tral bank deciding to withdraw the Rs 2000 denomination
facilitate a better alternative of cash and a few systems are banknotes from circulation from May 2023, which has re-
already in operation. Covid-19 pandemic have pushed the sulted in the central bank getting 97.83 percent of Rs 3.56
digital uses in the world in general and particular in India. lakh crore worth notes back into the banking system.

30 | 2025 | OCTOBER | BANKING FINANCE