Central bank looks at the future of digital currencies

The Reserve Bank of India is issuing a Central Bank Digital Currency (CBDC) on an experimental basis from late 2022. A central bank digital currency based on blockchain technology was introduced in the retail sector among a limited user group, whose participants include consumers and merchants. Experimental central bank digital currencies currently facilitate person-to-person transactions and person-to-merchant transactions using digital currency wallets. After the experience so far, the Reserve Bank has proposed that programmability (in this case a computing system capable of understanding, accepting and following instructions) and offline functionality of this currency should be attempted so that not only digital, but also this currency will be adopted. The currency will increase, but it will also help achieve public policy goals.

As the central bank said in its announcement, 'programmability' will allow users such as government agencies to ensure that payments are made for scheduled benefits. This means that the underlying rules chosen will restrict the use of the currency. With such features the government will also be in a position to ensure that the currency is used properly. For example, if the government or any other agency pays school students in digital currency to buy books, it will only be used in bookstores.

By design, if the currency is not used for a certain period, it can be returned to the sender's account. This will ensure that the money is spent properly. This will also reduce the risk of fraud. Similar methods can also be used by private companies to meet specific cost requirements.

For example, fuel costs and expenses incurred on employee business trips. In addition to its use in the retail sector, better use will accelerate its adoption in financial markets. Another important aspect was included in the Reserve Bank's statement and it was related to the offline use of central bank digital currencies. It can also be paid in areas with poor or limited internet availability. If properly implemented, both of these functions can economically increase government spending and improve public welfare.

Programmability in digital currency will tilt the balance towards cash transfers as it will provide a kind of certainty that the currency will be used for the purpose for which it is being used. It is also worth noting that programmability will not affect fungibility. Fungibility refers to the property of an object in that its individual units are interchangeable.

The digital infrastructure that India has built over the past few years, especially in the area of ​​payments, has great potential for the use of central bank digital currencies. Certainly, mass adoption of such a program will take time. People who are economically excluded are often digitally excluded as well. Basic digital literacy and a mobile phone are required to use central bank digital currencies. However, since the central bank digital currency is still in the experimental stage, the Reserve Bank will make necessary improvements based on its usage and performance experiences so that it can be introduced on a wider scale.