Index
What is CBDC (Central Bank Digital Currency)?
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The Reserve Bank of India defines CBDC (Digital Rupee (e ₹) as the legal tender issued by a central bank in digital form. It resembles sovereign paper currency but is presented in a different way. It can be exchanged at par with the current currency and is recognized as a method of payment, legal tender, and a secure place to deposit value. Although CBDC is a digital currency, it cannot be compared to the private virtual currencies that have exploded over the past ten years. Private virtual currencies are in stark contrast to the traditional understanding of money. Due to the lack of an inherent worth, they are not commodities or claims on commodities.
CBDC VS Cryptocurrency
There are difference between the CBDC and Cryptocurrency, some of them are mentioned below:
| CBDC | Cryptocurrency |
| A central bank digital currency can be thought of as the digital version of a nation’s fiat currency, whereas cryptos are digital assets on a distributed network. | A cryptocurrency is a type of digital currency that, with its encryption algorithms, serves as an alternative payment method. |
| The CBDCs operate on authorized (private) blockchains | Cryptocurrencies operate on permissionless (public) blockchains. |
| CBDCs are legal tender; they cannot be used as stock or security tokens in the same way that Crypto does. CBDCs use the blockchain technology in an entirely centralised manner. A central bank oversees and facilitates the transactions with the help of another third-party organisation | A decentralized network infrastructure is used to store cryptocurrencies, enabling transactions to be carried out, verified, and added to the public ledger without the interference of a third party. |
| A central bank determines the regulations for CBDC networks | The authority in crypto networks is given to the user base, which makes choices through consensus. |
| Digital currencies issued by central banks would also minimize the dangers associated with utilizing digital currencies in their current form. | Cryptocurrencies are very volatile, with their value shifting all the time. Cryptocurrencies are classified as both assets and currency in terms of use cases. |
Type of CBDC
CBDC can be classified into two broad types, viz. general purpose or Retail (CBDC-R) and Wholesale (CBDC-W).
Wholesale CBDC (CBDC-W)
It is typically used for transactions between a nation’s central bank and its public/private banks. Payments made with CBDC assist in lowering the risks associated with counterparty credit and liquidity. This area is one of CBDC’s most crucial uses since it contributes to the nation’s whole financial system becoming faster, safer, and more efficient. It would enable the RBI to communicate more quickly with its intermediaries in the Indian context and contribute to the improvement of the real-time gross settlement (RTGS) system already in operation.
By establishing a corridor network, or “bridge,” with an operator node jointly controlled by the central banks of the participating nations that issue the depository receipts, wholesale CBDC can facilitate cross-border transactions between the wholesale CBDC systems of other countries. It aids in accelerating and securing cross-border payments among the participating central banks.
Retail CBDC
Retail CBDC serves as the digital representation of fiat money intended for the public and is utilized by regular customers to deal in money for day-to-day activities. Distributed ledger technology (DLT), such as a private blockchain network managed by the government, is typically the foundation of retail CBDC and enables it to track transactions while maintaining anonymity. Additionally, it assists in minimizing the involvement of third parties, hence preventing any illicit behavior like fraud or money laundering.
The central bank may issue retail CBDC directly to the public. Direct issue is the name given to this type of issuance. As an alternative, retail CBDC might be distributed to middlemen—such as public or private banks—who would then distribute it to the public like a fiat currency. This distribution strategy, known as indirect issuance, transfers counterparty risk to regulated intermediaries. As in the case of indirect issuance, a third issuance approach known as hybrid issuance can also be used, in which retail CBDC is issued to intermediaries. In contrast, the central bank frequently updates its own ledger with the retail balance records in the case of hybrid issue.
CBDC and Its role in SCM
In the entire supply chain, there are a wide range of customer-facing activities where the central bank is unlikely to have a comparative and competitive advantage as compared to banks, especially in an environment where technology is changing rapidly, which inter-alia includes distribution of CBDCs to public, account-keeping services, customer verification such as KYC and adherence to anti-money laundering and counter-terrorist financing checks, transaction verification, etc.
Programmable payments can also be used in industrial supply chain ecosystems. In this case, pre-programmed digital CBDC could only be used for specific purposes such as fuel expenses and state border taxes.
Additionally, it might be used to settle payments for imports and exports, doing away with the requirement for an expensive network of correspondent banks. Additionally, CBDCs can speed up international money transfers and lessen the need for logistical activities like note printing. With CBDCs, transaction costs can be reduced, authentication can be enhanced, and payment efficiency can all be boosted to the benefit of retail users.
In addition to bringing those working in “last mile” delivery and supply chain jobs into the official financial fold, this transition from cash to digital currency will make the economy more open and effective.
Corporate development leaders may start an investigation along several product lines to establish transparency on expected effects, whether favorable or unfavorable, on value chain segments. For many organizations, especially those that facilitate transactions, securing a lucrative position inside the mutating and increasingly modularized value chain will be essential.
Product and service owners should keep prioritizing possible CBDC uses and identifying chances to use them to produce a good bottom line. These opportunities may include decreases in transaction costs, decreased risk, or new prospects for revenue creation (such as new approaches to processing payments and integration with new systems or new services).
Conclusion
For the ecosystem’s participants, the CBDC will open a lot of possibilities for developing services that make it simpler and more practical for people to transact and make digital payments for a variety of use cases and requirements. It could be used to lower credit and liquidity concerns and increase the effectiveness of payments and securities settlement. It can be argued that digital payment is helpful in supply chain management applications and digital currency will improve visibility in the supply chains.
Also read: What are General Finance Rules (GFRs) & where they are Used?
