CBDC Pilot project has been launched from Today
What it is?
How does it change the Payment Industry?
How is it Different from UPI?
Interesting Thread Ahead๐งต
What it is?
How does it change the Payment Industry?
How is it Different from UPI?
Interesting Thread Ahead๐งต
๐๐ก๐๐ญ ๐ข๐ฌ ๐๐๐๐?
- Digital form of currency notes issued by RBI (e-โน)
- In layman's terms, it is money that don't have physical existence and exists digitally only!
- not much different from banknotes, but being digital it is easier, faster and cheaper
- Digital form of currency notes issued by RBI (e-โน)
- In layman's terms, it is money that don't have physical existence and exists digitally only!
- not much different from banknotes, but being digital it is easier, faster and cheaper
The key design choices to be considered for issuing CBDCs include
- Types (Wholesale/Retail CBDC)
- Models for issuance and management (Direct, Indirect or Hybrid model)
- Form (Token/Account based)
- Instrument Design (Remunerated/Non-remunerated)
- Degree of Anonymity
- Types (Wholesale/Retail CBDC)
- Models for issuance and management (Direct, Indirect or Hybrid model)
- Form (Token/Account based)
- Instrument Design (Remunerated/Non-remunerated)
- Degree of Anonymity
๐๐ฒ๐ฉ๐๐ฌ ๐จ๐ ๐๐๐๐
Two broad types
1. General purpose/Retail (e-โน R)
2. Wholesale (e-โน W)
Two broad types
1. General purpose/Retail (e-โน R)
2. Wholesale (e-โน W)
Retail e-โน would be potentially available for use by all (Private sector, non-financial consumers and businesses)
While wholesale CBDC is designed for restricted access to select financial institutions
While wholesale CBDC is designed for restricted access to select financial institutions
Wholesale e-โน is intended for the settlement of Inter-bank transfers and related wholesale transactions
While Retail e-โน is an electronic version of cash primarily meant for retail transactions
While Retail e-โน is an electronic version of cash primarily meant for retail transactions
๐๐จ๐๐๐ฅ ๐๐จ๐ซ ๐ข๐ฌ๐ฌ๐ฎ๐๐ง๐๐ ๐๐ง๐ ๐ฆ๐๐ง๐๐ ๐๐ฆ๐๐ง๐ญ ๐จ๐ ๐๐๐๐
Two models for issuance and management of e-โน:
1. Direct model (Single Tier model)
2. Indirect model (Two-Tier model)
Two models for issuance and management of e-โน:
1. Direct model (Single Tier model)
2. Indirect model (Two-Tier model)
A Direct model would be the one where RBI is responsible for managing all aspects of the CBDC system viz. issuance, account-keeping and transaction verification
In an Indirect model, RBI & intermediaries (Banks), each play their respective role
In this model RBI issues CBDC to consumers indirectly through intermediaries and any claim by consumers is managed by the intermediary (RBI only handles wholesale payments to intermediaries)
In this model RBI issues CBDC to consumers indirectly through intermediaries and any claim by consumers is managed by the intermediary (RBI only handles wholesale payments to intermediaries)
๐
๐จ๐ซ๐ฆ๐ฌ ๐จ๐ ๐๐๐๐
e-โน can be structured as:
- token-based
- account-based
e-โน can be structured as:
- token-based
- account-based
A token-based CBDC is a bearer-instrument like banknotes i.e whosoever holds e-โน at a given point would be presumed owner
An account-based system would require maintenance of record of balances & transactions of all holders of e-โน and indicate the ownership of monetary balance
An account-based system would require maintenance of record of balances & transactions of all holders of e-โน and indicate the ownership of monetary balance
Also, in a token-based e-โน, the person receiving e-โน will verify that his ownership of the token is genuine, whereas in an account-based CBDC, an intermediary verifies the identity of an account holder
Considering the features offered by both the forms of CBDCs, a token-based e-โน is viewed as a preferred mode for CBDC-R as it would be closer to physical cash, while account-based CBDC may be considered for CBDC-W
๐๐๐๐ก๐ง๐จ๐ฅ๐จ๐ ๐ฒ ๐๐ก๐จ๐ข๐๐
1. On Conventional centrally controlled database
2. On Distributed Ledger Technology
The two technologies differ in terms of efficiency and degree of protection from single point of failure
1. On Conventional centrally controlled database
2. On Distributed Ledger Technology
The two technologies differ in terms of efficiency and degree of protection from single point of failure
๐๐จ๐ฐ ๐ข๐ฌ ๐ข๐ญ ๐๐ข๐๐๐๐ซ๐๐ง๐ญ ๐๐ซ๐จ๐ฆ ๐๐๐?
๐๐ก๐ฒ ๐ฎ๐ฌ๐ ๐๐๐๐ ๐ข๐ ๐๐๐ ๐ข๐ฌ ๐๐ฏ๐๐ข๐ฅ๐๐๐ฅ๐?
Let's find out
๐๐ก๐ฒ ๐ฎ๐ฌ๐ ๐๐๐๐ ๐ข๐ ๐๐๐ ๐ข๐ฌ ๐๐ฏ๐๐ข๐ฅ๐๐๐ฅ๐?
Let's find out
When you deposit your money with a bank, the bank assumes responsibility for your cash, which previously a liability of the RBI and receives a little interest payment
This balance kept with banks is used by UPI (It is still a Physical Currency)
This balance kept with banks is used by UPI (It is still a Physical Currency)
Even if deposits up to โน 5 lakhs are guaranteed, there is a possibility that the bank will miss the deadline or take longer than expected to pay u
Since you interact directly with the RBI and transactions are settled without an intermediary, E-โน has lesser risks
Since you interact directly with the RBI and transactions are settled without an intermediary, E-โน has lesser risks
The only asset in a domestic economy that is free from credit and liquidity risk is central bank money
Now CBDC satisfies this requirement along with Cash
As a special asset, there may be further applications, such as the direct conversion of e-โน into government or RBI bonds
Now CBDC satisfies this requirement along with Cash
As a special asset, there may be further applications, such as the direct conversion of e-โน into government or RBI bonds
If UPI malfunctions, it can also serve as a fallback protocol. There are numerous options.
Cash has main benefit over bank balances "PRIVACY"
Cash is still used for many transactions because it provides secrecy and doesn't create a digital trail
Cash has main benefit over bank balances "PRIVACY"
Cash is still used for many transactions because it provides secrecy and doesn't create a digital trail
It is difficult to predict if e-โน will maintain the same level of anonymity, as Cash offers (Which I don't think is going to happen)
With a digital money, this is challenging to do because every transaction would leave some sort of digital trace
With a digital money, this is challenging to do because every transaction would leave some sort of digital trace
Additionally, it shouldn't be feasible to conduct un-authorised transactions on the network
Therefore, there may be some differentiation there
- Greater anonymity for High Value transactions
- Less for those with significant value
Therefore, there may be some differentiation there
- Greater anonymity for High Value transactions
- Less for those with significant value
Is it appropriate for e-โน to pay interest to bearers?
If these offered interest, according to RBI, many customers would transfer their accounts to RBI, making it difficult for banks to attract deposits
Bank profitability would decrease if deposit rates rose
If these offered interest, according to RBI, many customers would transfer their accounts to RBI, making it difficult for banks to attract deposits
Bank profitability would decrease if deposit rates rose
In the end, these costs would be passed on to customers via banks
RBI would not want this to happen
However, if there is no incentive, there may be very little adoption of e-โน
RBI would not want this to happen
However, if there is no incentive, there may be very little adoption of e-โน
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