Page 24 - Banking Finance May 2024

ARTICLE

Like the UPI, which is interoperable with India's financial enables real-time fund transfers. The Eastern Caribbean
system, a CBDC will facilitate seamless transactions between Central Bank's DCash, a CBDC, offers quick and seamless
digital wallets and payment systems. Like Jan Dhan, CBDC cross-border payments. A CBDC can also be fine-tuned for
can also operate as a single wallet. sectors like retail, and for wholesale domestic or cross-border
payments, meeting the user's specific needs of speed and
Here, India has more at stake than many other countries. efficiency. For cross-border payment settlements, a CBDC
The globally acclaimed success of its Unified Payments can even overcome hurdles like differential laws, processes
Interface (UPI), which has outclassed credit and debit card and due diligence requirements, apart from time-zone
usage since its launch in 2016, has been projected globally variations. This is the result of institutional and regulatory
as the next big thing in digital public infrastructure (DPI), cohesion across sovereign jurisdictions.
with proven self-owned technology at its base. With over
10 billion transactions in August 2023, worth nearly Rs. 15.8 Enhanced security:
trillion, UPI is a big success.India's efforts to promote its CBDCs can integrate robust security mechanisms aimed at
CBDC are based on a deep understanding of domestic financial stability. They can be modified to offer advanced
financial realities and a desire to promote payments security features, reducing the risk of fraud and cyberattacks
sovereignty abroad. Let us look at five factors that will be and favouring trust and user adoption. Bahamas' Sand Dollar,
central to this push for example, uses modern encryption and authentication
techniques, warding off cyber threats and enhancing user
In the future, CBDC will be the digital counterpart of your trust. Like our UPI, it promises secure transactions. As a
country's money, while UPI will be the bridge connecting country prone to natural calamities, Bahamas hopes its CBDC
different banks in an instant. Picture making purchases will eventually provide a viable alternative to those who often
online or sending funds to friends with a simple tap, powered get knocked off the financial grid.
by the magic of CBDC and UPI.
Yet, concerns of privacy violation and confidentiality have
Reduced transaction costs: been raised in some quarters, globally. With facilities like
access options, a choice of total or zero anonymity and
Structural simplicity ensures that CBDCs can drastically lower
transaction fees and processing costs. For example, limited or 24-by-7 availability, a CBDC can solve many of
merchants and consumers would find its end-to-end digital these apprehensions.
payment processes both cheaper and faster. Since CBDC
payments are real-time, gross and final, its use lowers Advantages and Disadvantages of UPI
settlement risk in the financial system, lending it better and CBDC :
stability.
Advantages of UPI:
Enables fast and convenient digital payments using a
Interoperability and standardization: smartphone.
Like the UPI, which is interoperable with India's financial
system, a CBDC will facilitate seamless transactions between
digital wallets and payment systems. Like Jan Dhan, CBDC
can also operate as a single wallet. If merchants join the
CBDC ecosystem, transactions can happen without a PIN,
making it especially effective for cross-border transactions,
merchant payments, peer-to-peer transfers and
remittances. Central banks are committed to minimizing the
impact of CBDCs on financial intermediation and credit
provision.

Efficiency and speed:

CBDCs can facilitate near-instant transactions, just as UPI

22 | 2024 | MAY | BANKING FINANCE