By Mihir Gandhi & Vivek Belgavi
CBDCs can be instruments that support the public policy objectives of the government by providing a safe and resilient means of payments. They promote efficient, inclusive and innovative payments if properly monitored, and the risks involved are overcome through effective means.
Apart from being a tool for digital transformation of payments, CBDC has multiple facets. It has multiple forms in terms of usage across different geographies. Five major use cases in the Indian context are discussed below.
Programmable payments (DBT): A possible use case for CBDC is ‘fit-for-purpose’ money used for social benefits and other targeted payments in a country. For such cases, the central bank can pay intended beneficiaries pre-programmed CBDC, which could be accepted only for a specific purpose. For example, pre-programmed CBDC could be issued for LPG subsidies as direct benefit transfer (DBT). This CBDC could only be accepted at authorised LPG agencies and would be declined for use in other areas. LPG agencies would be able to convert this CBDC to a general-purpose CBDC or fiat currency at any commercial bank, which would have the necessary authorisation to change the nature of the CBDC.
Such subsidies can also be extended to other sectors such as agriculture, where subsidies for fertilisers could be transferred via the CBDC route. This CBDC could only be accepted at authorised fertiliser outlets, ensuring minimal leakage in the subsidy programme. Programmable payments can also be used by other organisations for their employees’ expenses, including for fuel and telecom bills. Moreover, 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.
Cross-border remittances: CBDCs could be used for faster cross-border remittance payments. International collaboration among the major economies of the world, including India, could help create the necessary infrastructure and arrangements for CBDC transfer and conversion. Such infrastructure must ensure interoperability of CBDCs across jurisdictions and quick transfer of CBDC for success. In such an environment, CBDC remittances could happen in real time, rapidly reducing the time required for the payment to be received by the intended recipient.
Retail payments: CBDCs can also be used for retail payments. Payment instruments could be made available for payment transactions to be made via CBDC. Furthermore, universal access attributes of a CBDC could also include an offline payment functionality. Retail CBDC distributed by the RBI and commercial banks would have to be held in electronic wallets/ accounts by the end users. This would enable payment means between the following:
• Consumer to consumer: Where consumers could exchange CBDC between their wallets
• Consumer to business: Where consumers can use CBDC to pay for products and services
• Business to business: Where businesses can exchange CBDC between their corporate account wallets
As CBDCs offer instant settlement, they lower the risk in clearing and settlement of retail payments, thus reducing counterparty risk. CBDC’s underlying technology, along with the currency’s digital nature, make it superior to existing digital payments. Its irrefutable nature combined with ownership record transfers can provide irrefutable evidence of proof of ownership.
MSME lending: Instant lending to micro, small and medium enterprises (MSMEs) in India can be possible with the help of CBDC. As more MSMEs use CBDC, banks can draw up a more accurate borrower risk profile. This can be used to promptly meet MSME financing requirements. Moreover, stimulus for MSMEs can also be disbursed quickly from the central bank. This can help businesses grow and sustain themselves during periods of uncertainty where availability of cash is limited. CBDC’s traceability can help MSMEs prove their creditworthiness. Moreover, it leads to transparency and can be extremely resilient to forgery.
Offline payments: Offline payment is another avenue which can be enabled by CBDC. The offline wallet in general would be a separate wallet and could be based on near-field communication (NFC) technology. The digital wallet/application can be used in NFC-enabled devices – a feature phone or a smartphone. In areas with weak networks or with no internet, it will be a highly secure and easy solution for peer-to-peer payments. The verification of identity, confirmation of a transaction and payment will happen over the offline wallet in an account-agnostic way without the need for an internet connection.
Excerpted from PwC India’s ‘Central Bank Digital Currency in the Indian context’ report, dated September 2021
The authors are, respectively, partner & leader (payments transformation), and partner & leader (fintech), PwC India
