Page 36 - Banking Finance October 2025

A R T IC L E
ARTICLE
elaborating on the role of distributed ledger technology -
blockchain - with a mention of CBDCs.

There isn't a consensus on the definition of a Central Bank
Digital Currency. The CPMI-MC Report (2018) has described
CBDC as "A central bank liability, denominated in an exist-
ing unit of account, which serves both as a medium of ex-
change and a store of value." Expanding the scope of CBDC,
the Bank of England described it as, "An electronic form of
central bank money that could be used by households and
businesses to make payments and store value. This wider
access to central bank money could create new opportuni-
ties for payments and the way the bank maintains monetary even time zone variations across the world are responsible
and financial stability." for delay and higher cost. Much of the future efficiency

enhancement will come from achieving upstream institu-
In the survey of 66 central banks, which included the RBI,
tional and regulatory cohesion across sovereign jurisdictions.
conducted by the BIS in 2018 and late 2019, 80 percent
central banks reported that they were actively engaged in
The G20 has been working on this for some time in associa-
research, experiments, or development work related to
tion with the BIS and the Financial Stability Board - both
CBDC. The survey indicated that 40 percent of central banks international organizations, the former owned by central
have progressed from research to experiments or proof-of- banks, the latter established after the Western Financial
concept, whereas another 10 percent of respondent cen- Crisis 2009.
tral banks have developed pilot projects. Financial inclusion,
domestic payment efficiency, and payments safety are sig- Central Banks are considering CBDC for two main reasons:
nificant motivations for central banks to consider CBDCs in
financial inclusion and the declining use of cash in advanced
emerging market economies. On the other hand, in ad- economies. These central banks include those in Bahrain,
vanced economies, the significant motivations were finan- Egypt, India, Indonesia, New Zealand, Russia, and Switzer-
cial stability, payment safety, and robustness.
land. Some developing economy central banks have men-
tioned reducing the costs and risks associated with the dis-
Advantages of CBDC tribution of physical cash. Another major consideration for
First, unlike cash fiat money, CBDCs are flexible. They can issuing CBDCs is the disintermediation (The term
be cheaply and effectively designed for specific purposes like disintermediation refers to the process of cutting out the
retail, and wholesale domestic or cross border payments. financial intermediary in a transaction.) of commercial
CBDCs can implement regulatory and policy restrictions banks since people can hold their money directly with the
better than the existing alternative - conditional transfer central bank.
of grants to citizens as digital money through banks with
subsequent audit on how the money was spent. Payments This could reduce dependence and the role played by com-
can be restricted by value, related to the number of trans- mercial banks in the financial system and could have major
actions or the capital stock (as in China), and enable access implications for financial stability (The 2022 McKinsey Glo-
to specified goods and services like food, health care or edu- bal Payments Report, 2022). Characteristics of a well-de-
cation, public transportation facilities, or paying tax. signed CBDC is being discussed well arguably, such as an
account-based CBDC being a practically costless medium of
Second, CBDC transactions can be tracked, unlike cash exchange; it could also act as an interest-bearing secret
money which leaves no audit trail. In jurisdictions where store of value with a rate of return in line with risk-free
State accountability is low, potential encroachment on citi- assets such as government securities.
zen rights is a big negative. Third, CBDCs have the poten-
tial to speed up cross border payment settlement. Pres- With the gradual obsolescence of paper money, CBDC could
ently, differential law, processes, due diligence methods and be introduced with wide availability to the public. The pa-

32 | 2025 | OCTOBER | BANKING FINANCE