Will central bank's digital currencies move needle on online transactions?

Central Bank Digital Currencies or CBDCs as they are more popularly known have come into the limelight of late but the idea is one that has been around for a few decades now. As things stand, there appears to be more talk than any massive movement on the ground.

That will change, however; it has been reported that about 80 percent of central banks are exploring CBDC use cases.

The People’s Bank of China is in an advanced stage of its pilot with over 2 million citizens having received e-yuan in a digital wallet to spend at select merchants – it involves scanning a QR code from the wallet to complete the transaction. The Bahamas central bank introduced their CBDC in late 2020 – called the Sand Dollar – which the expectation being “to reduce service delivery costs and increase transactional efficiency for financial services across The Bahamas.”

This expectation is what will drive the introduction of CBDCs across the major economies. The European Central Bank has launched a 24-month project with the aim to “address key issues regarding design and distribution” while the Swedish Central Bank has also started an e-Krona pilot.

In India, the CBDC discussion has picked up steam in recent weeks with Mr.

Rabi Sankar, Deputy Governor, Reserve Bank of India having given a speech on the topic on July 22. In it he said, “A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.” News reports suggest the RBI will likely come out with a model on digital currency by this year end.

From a central bank perspective, launching a CBDC helps on multiple fronts including transmission, efficiency and costs. There have been fears that this could potentially disintermediate banks but those fears are largely overblown because it would mean having to reinvent existing expensive infrastructure – the liability will still be that of the central bank though. So therefore it is worth asking whether the introduction of CBDCs will move the needle on digital payments and the short answer is ‘Yes’ but with a caveat.

In a country where about 90 percent of transactions are still cash based, a digital equivalent of physical cash will go a long way to reduce this. Received wisdom is that people transact with cash to escape tax liabilities but that is probably a simplistic answer; according to the RBI “Cash is all pervasive, easy to use and store and offers great convenience.”

With reference to the aforementioned caveat, the central bank’s M1 money supply should steadily increase towards the digital form. It goes without saying that merchant and consumer education will also go a long way to boost this. For it to succeed from a merchant acceptance perspective, this needs to be driven by banks and fintechs. The reality is that there is a payment acceptance infrastructure in place and one that can be scaled up to provide increase acceptance. However, there should be incentives in place to drive this growth; incentives that can paid from reduced costs of printing money and its distribution. With the current zeitgeist of contactless payment transactions, a CBDC will truly be one from the start.