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Central Bank Digital Currencies: When will they become a reality, and what experts think about CBDC

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According to a 2021 survey by global banking think tank BIS, nearly 86 percent of the central banks surveyed were actively engaged in researching CBDC, 60 percent were testing the underlying technology and 14 percent were already in the pilot-project phase

Central Bank Digital Currencies: When will they become a reality, and what experts think about CBDC
Rising interest in cryptocurrencies has prompted central banks across the world to consider issuing their own digital currencies referred to as the Central Bank Digital Currency (CBDC). The Indian government recently said that Reserve Bank of India is working on its own digital currency.
According to a 2021 survey by global banking think tank BIS, nearly 86 percent of the central banks surveyed were actively engaged in researching CBDC, 60 percent were testing the underlying technology and 14 percent were already in the pilot-project phase.
CBDC is a digital banknote that individuals or financial institutions can use to transact with businesses, retail outlets, or with each other. There are multiple benefits of CBDC. "Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option," RBI deputy governor T Rabi Sankar pointed out at his keynote address in a recent webinar.
Sankar said the case for CBDC for emerging economies is thus clear – CBDCs are desirable not just for the benefits they create in payments systems, but also might be necessary to protect the general public in an environment of volatile private VCs.
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However, experts in India also pointed out the challenges in the implementation of CBDC. In rural areas, for example, cash transactions are dominant. The infrastructure powering CBDC transactions must be erected even in remote areas such that financial inclusion is achieved. Uninterrupted access to the internet and electricity is imperative for executing such projects and it may take time.
Sankar also outlined the risks associated with CBDCs. He said CBDC would make it easy for depositors to withdraw money in case of any stress in any bank. "Flight of deposits can be much faster compared to cash withdrawal," Sankar said.
Some experts also believe CBDCs are given more importance than they should be. “I think CBDCs right now are running the risk of being massively overhyped and under-delivering,” Garrick Hileman, head of research at crypto company Blockchain.com told CNBC.
Experts have been highlighting that ensuring privacy and surveillance are major issues that need to be ironed out before CBDCs can actually take shape.
Nations like Ecuador have already experimented with CBDC and have not been entirely successful yet. However, the reasons are likely to be political and not technical. The Ecuadorean CBDC program was operational for three years during which the central bank witnessed the opening of 400,000 accounts. But 70 percent of them remained inactive and the project was eventually scrapped by April 2018.
China is speeding up the issue of the digital version of the yuan and could prove to be the first country to launch a CBDC.
Sweden, a country that has not yet formally adopted CBDC, looks better poised for success on this front. According to Carl-Andreas Claussen, Senior Advisor at Riksbank cash equivalent to just 1% of its GDP is currently in circulation in Sweden. This is one of the lowest in the world.
Moreover, Handelsbanken, the largest bank in Sweden by AUM, has joined hands with the Swedish central bank in the testing of e-krona – the Swedish digital cash project. The e-krona project also stands out one in one key aspect I.e., the CDBC accounts will be held by commercial banks instead of the central bank. The central bank believes that it will make transacting via e-krona a much more hassle-free experience this way.
Bank of England though does not expect central banks to issue their own digital currencies anytime soon. Earlier this week, it said even if it decides to push ahead with the proposed digital currency dubbed as 'Britcoin' it’s unlikely to arrive until at least 2025. And that is only if it’s found to be “operationally and technologically robust.”
This is similar to what RBI Governor Das said at the Times Network India Economic Conclave 2021. Das said: “While we are working on introducing a digital version of the fiat currency, the Reserve Bank is also assessing the financial stability implications of introducing such a Central Bank Digital Currency (CBDC). As the underlying technology is still developing, we are exploring ways for a clear, safe, and legally certain settlement finality, which is most crucial for a secure and efficient payment system."
But as Hileman pointed out, "We’ve been talking about CBDCs for years now...This is now firmly on the radar for central banks."
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