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CBDCs: A Positive Move Towards Mass Crypto Adoption in India

2021-09-02

In this article, learn how India’s upcoming CBDC will help grow the crypto ecosystem and bring in positive regulation.

Key Takeaways

1. CBDCs are digital fiat currencies regulated and issued by a central bank. 

2. Replacement of large cash usage by CBDCs can reduce cost of printing, transporting, storing and distributing currency.

3. CBDCs will address the concerns Indian investors may have with regard to investing in Cryptocurrencies

4. CBDCs can help countries inject liquidity in the crypto markets, encouraging more users to trade crypto with local fiat currencies instead of USD pairs

What are CBDCs?

Central Bank Digital Currencies, also known as CBDCs, are the digital form of fiat currencies already in circulation that is regulated and issued by a central bank,  in this case, India. CBDCs will be a legal tender issued by the governing authorities and  accepted like fiat currency.

 

To address concerns over two coexisting currencies, the Reserve Bank of India (RBI) presented a keynote in July 2021 that reassured the paper Rupee will still be valid after the CBDC is issued.

Why does India need CBDC? 

In his keynote address in July 2021, the RBI’s Deputy Governor mentioned the following advantages of CBDCs

 

  • CBDCs will speed up settlements between foreign banks that have CBDCs

  • India’s large dependence on cash usage can be replaced by a digital rupee, reducing the cost of printing, transporting and distributing currency.

  • A CBDC would reduce the risk of banks not honoring their contracts from intra-bank settlement errors as a CBDC would be faster to settle and would not need to rely on each bank’s infrastructure.  

What does that mean? 

This means that the regular fiat currency, your paper bills and the money in your bank account,  and the CBDC will coexist in a new environment. So your paper bills and the newly issued CBDC will both be available for daily transactions.

 

Right now some of the challenges faced by electronic payments include: Banks being offline or having their platform under maintenance, relying on third party applications to process transactions and failed transactions caused by internet outages.  

 

Similar to cryptocurrencies, CBDCs will not need the other party to be online to settle transactions, i.e. If you send a transaction to a wallet address that is offline, they will still receive the payment instantly, regardless of the wallet being connected to the internet at that point of time or not. Users will also have an array of settlement options, including p2p, central banks and even third parties.  

How will CBDCs affect crypto in India??

Most Indian investors are discouraged to buy cryptocurrencies mainly because they are unsure about the regulatory framework around it, they do not understand the technology and its applications or they have been wooed off by the volatility in the past. However, the introduction of CBDCs will, to a certain extent, try to address these concerns that an Indian Investor might have before getting into the crypto space: 

How will they impact regulation?

There exists no concrete regulation around the use of cryptocurrencies such as Bitcoin, Ethereum, and BNB. The existing challenges faced by the Indian regulators to build regulations around virtual currencies is a lack of understanding of these digital assets and how to accept it as a new asset class. 

 

The introduction of CBDCs will make it easier for the masses, who are not as tech savvy as early crypto adopters, to use this digital currency and see for themselves how easy it is to use this digital form of money and its advantages over old payment methods.

 

As highlighted by India’s Deputy governor, Shri T Rabi Sarkar, in his keynote address delivered on CBDCs in July 2021, the introduction of CBDCs will require enabling a legal framework since the current legal framework only takes into account the currency in paper form. This will include making changes to numerous sections of the legal framework that has been authorised by the RBI.

 

Hopefully, the RBI will include a legal framework to incorporate cryptocurrencies along with the documentation of the new bill revolving around CBDCs, encouraging  legislatures to look at cryptocurrencies in a similar category and allow a more open view of regulation around the whole space. 

Education

The RBI also mentioned that CBDCs would bear the same security risks as the electronic banking system and could be vulnerable to cyber attacks if people are not informed. They emphasised the fact that initiatives for financial literacy and having high standards of cybersecurity will be rolled out along with the CBDC itself.

 

This will educate people about keeping their information secure and stay away from fraud, thereby benefiting the crypto industry, which gets misunderstood when people lose funds to hacks when they do not take such measures.

 

A more financially literate demographic that has access to the internet and in future would be introduced to a digital form of currency will ultimately encourage investors to normalise the idea of cryptocurrencies coexisting in the same environment with fiat currencies. Crypto has been seen as a threat to different fiat currencies but on the contrary it has allowed users to trade and compare their value against fiat currencies. 

 

This education initiative might also create understanding for a younger demographic in schools that may have a huge impact for future prospective talent in the crypto sector that can work in technology and other fields, ultimately benefiting the entire crypto ecosystem.

Liquidity and Volatility

Currently, most cryptocurrencies are traded against USD, which can be considered as an unofficial reserve currency for cryptos in a general sense. That also makes sense as the US already has a structured set of regulations around the legal framework of cryptocurrencies.

 

CBDCs can help inject liquidity in the crypto markets to get more users to trade local fiat currencies rather than rely on USD pairs. So hypothetically, investors in this way could simply just trade directly against the CBDC pairs. Currently, to trade BNB, any non-US investor may first convert their fiat to crypto by buying USDT on p2p, Then use that USDT to buy BNB.

 

This can be replaced by direct BNB-INR/ BNB-<Local currency> pairs with the CBDC, and would result in more and more investors using INR base pairs as their choice of currency to denote the value of the counterpart crypto pairs. 

 

Once people have been educated about the CBDCs, they are more likely to understand how crypto currencies work besides the common price fluctuations. As in any market, the price fluctuations are prevalent. Even in the stock markets, it is considered a safer investment just because stock trading has been normalised around the globe, and there exists a detailed set of regulations around the stock markets.  

Conclusion 

CBDCs might bring in the regulatory framework needed to give crypto a push towards mass adoption. As the educational initiatives increase, so will the likelihood of people understanding the importance of cyber security, making people responsible for storing their own money and building a healthier approach towards the coexistence of cryptos and fiat.