I can't predict the future as to what will unfold prospectively for all of us, as no one would know what lies ahead, but I have made this attempt to pen down my views for the benefit of the readers of this article which dwells on the topic of Central Bank Digital Currency - A Curtain Raiser, A Catalyst.
Traditionally, cash is considered as "King" - because of the distinctive anonymity of its ownership, unless it is admitted and confirmed by its owner. With the amendment of Reserve Bank of India Act, 1934 and also corresponding changes in the Indian Coinage Act, 2011, most of us are inquisitive as to what these changes would mean to all of us?
Introduction
Most of us are familiar with the age-old theory/practice of Cash being used as a means of exchange for procurement of goods or services or both. In ancient times, Cash was represented in the form of physical coins of metals viz. Gold, Silver, Bronze, Iron etc. Each coin had its equivalent underlying value which was widely accepted as a mechanism of exchange for carrying out trade, commerce and business activities.
Govt. has announced launch of CBDCs(or e-Rupee) during the presentation of Finance Bill, 2021 which has triggered a lot of inquisitiveness amongst many stakeholders from the perspective of its Advantages, Benefits, Challenges, Threats and Concerns etc.
As of today, most of the stakeholders are quite well versed with modern means of payments viz. RTGS, NEFT, IMPS, UPI, G Pay, Pay TM, Digital Wallets, Amazon Pay, Phonpe and so on. Thus, it can be anticipated that most of them will not experience any major hiccups or teething problems in adapting to the new novel concept of CBDCs.
Will such introduction of CBDCact as a substitute for physical cash or whether cash and CBDC would run as parallel sub-systems in the Indian CashEco-system?
Meaning of CBDCs (Central Bank Digital Currency)
CBDC is known as Central Bank Digital Currency (hereinafter referred as "CBDC"), a modern-daycurrency avatar involving electronic data record and documentation.
CBDCs is electronic form of physical currency viz. coins and/or paper currency to be used by all. CBDCs would be considered as legal tender as it is recognised by the Govt. of India by amending RBI Act ,1934 & Coinage Act, 2011.
The concept of CBDCs derived its origin from the cryptocurrencies which have gained substantially in terms of its nature, size and volume. Such crypto transactions presently don't have much of substance over form, shrouded as they are in secrecy, leading to mind-boggling implications when operating in a non-regulatory environment, a system which involves data mining as and when the need arises, which actively monitors the demand and supply equation while introducing cryptos through the block chain technology in the market place.
On the other hand, CBDCs would be considered as legal tender built on blockchain technology platform using digital wallets or token and such wallets and/or token are recorded in Distributed Technology Ledgers,and its value would be expectedlysupported by the intrinsic values of gold and silver reserves in the economy held by the RBI, and also possibly not pegged to fluctuations in the prices of Gold. It is a new mode of exchange currency which can be exchanged one to one with existing currency. Such CBDC is an asset owned by the owner of such currency and at the same time it would constitute an obligation on the RBI to pay to such owner. Thus, it is a liability of the RBI in its financial statements.
To sum up, CBDCs would be termed as a legal tender unlike the extant Cryptocurrencies which are not considered as legal tender. Thus, CBDCs will have a clear edge over crypto currencies as it is legally recognised, easily transferable and its value is legally enforceable in the interest of all the stakeholders.
Purpose of Introducing CBDCs in Indian Eco-system
CBDCs are sought to be introduced in the Indian Ecosystem with enshrined purposes such as risk mitigations in trade, business and commerce; cost optimisation and trimming due to printing and replacement of physical currency due to its salvage, physical movements and logistics and/or hedge against loss arising due to theft and consequently triggering insurance costs etc.
With the introduction of CBDCs, it may act as a tool of discouragement for investing monies in crypto currencies and it will seek to create digital trails of such currencies when transacted.
One of other objectives of introducing CBDCs is to control illegal, nefarious and money laundering activities carried out by certain cross sections of people which tend to disrupt the effective and efficient functioning of the economy.
CBDCs - A Nebulous Concept in India and the Global Canvas
CBDCs in its form is a nebulous concept emerging in the eco system of India as well as on the World Canvas. According to the survey published by BIS (Bureau of International Settlements), 86% of Global Apex Banks are exploring the options of introducing the CBDCs in their eco-systems and some apex banks are exploring its introduction on pilot project basis to the test the effectiveness and efficiency of introducing such CBDCs.
Bahamas is the first country to introduce nation-wide CBDCs known as "Sand Dollar ", followed by Nigeria which rolled out eNaira in 2020, then by China as it introduced a pilot currency e- CNY in April 2020 and so on. Soon,most other countries are set to introduce CBDCs in one form or another.
CBDCs architecture may be in Direct and Indirect formats but due to inherent issues in the maintenance of data due to its size, nature and volume of records maintained by the Apex Bank, Indirect Format would be introduced whereby Apex Bank will transact through Banks, Finance Companies and Intermediaries who in turn will distribute to the end users in the electronic form. Indirect Format is similar to existing decentralised banking structure in the economy.
CBDCs would be introduced in tranches viz. Wholesale form (CBBCs -W) or Retail form (CBBCs -R).
Wholesale form (CBBCs -W) would be used to facilitate the Big Companies, Banks, Finance Companies and/or other intermediaries in general to manage larger scale of transactions for settling their business transactions using CBDCs.
Retail Form (CBBCs -R) would be useful for most of the retail end users like Shop Keepers, Vendors, Small Traders, Consumers and so on.
Advantages and Benefits of CBDCs
With the introduction of CBDCs in the Indian Eco system, it would be termed as providing the benefits of both the worlds to the people using the same viz. physical cash as well as electronic cash.Both the types will operate parallelly and seamlessly by harnessing modern technology.
In addition to the above, it will provide the safety of legal currency, reducing if not avoiding the cost of printing, transportation, logistics, holding and the resultant process loss. These benefits are of courseenjoyed by crypto currencies, and now in its avatar of CBDC it will operate in a regulatory environment, establishing digital trailsin the currency transaction documentation similar to documentation of existing Banking environment in the economy, which augurs well in terms of transparency, tracking and accountability.
Further, CBDCs can act as a faster, smooth, effective, efficient and safe means of settling international transactions in a speedy manner which is backed and recognised by economies of both the countries which would reduce overall cost of doing trade, business and commerce in general by reducing network of correspondent banks to settle international trade and commerce transactions.
With the introduction of CBDCs, it may provide the required impetus to convert more of the informal economy into formal economy whereby GDP of the economy is increased multi fold times due its acceptance and usage increasing progressively. This could helpIndia achieve its ambitious target of reaching "5 billion mark" as it catalyses economic transformation if not revolution in the way of doing of trade, business and commerce in general.
In a nutshell, the way I envisage, with the advent of CBDCs we may witness the following:
- Sea change in the functioning of the Payment mechanism system of the country
- Improvised digitization
- Increase and expansion of Taxbase of the economy
- New tool for the Fiscal monitoring and Budgetary Control by the Govt.
- Effective and efficient Balance of Payments Position of the economy
- Money movement with substantial reduction in risks
- Tax evasion would be drastically reduced at a pragmatical level
- Increased Digital Trail of transactions
- Use of Physical cash would be minimised
- No volatility like cryptocurrencies
- Substantial impact on money laundering as well as criminal activities
Challenges, Threats and Concerns of CBDCs
We are today witnessing widespread prevalence of financial frauds in the background of changing technology in the world of banking. The need for updated tech education and inherent safeguards is of paramount importance when transactions through banking channels are becoming more of a habit rather than a matter of choice. "Privacy Concerns"constitute a major area of challenge in the wake of multitude of transactions involving humongous data.The following challenges, threats and concerns can be visualised:
- Increased emphasis on Privacy of Data
- Lesser anonymity as compared to existing cash transactions, as CBDCs generatea digital trail of all the executed transactions
- Increased deployment of resources and associated costs for developing and deploying advanced algorithms,tech-based apps which presently may not be installed on the existing smart devices of the end users
- Focus on possible compromise and breach of credentials- to mitigate the risk of customer data being sold by intermediaries to new age marketing companies
- Obsolescence costs involved with technology as it materially changes by the time one blinks one's eyes
- Major Disruptions in Banking Industry.If end users shift their preference from traditional banking to CBDCs format, functioning of the Banking industry may encounter disruptions with the way the banks' function and thatcould pose a serious threat to small banks in terms of the resources required to remain relevant, feasible and viable in the new ecosystem...
- Perpetual Cyber Safety risks
- Retraining cost of personnel to relearn and master the theory and practice of CBDCs as a business segment which is new and yet to take firm roots
- Operational feasibility aspects of operating and managing CBDCs
Professional Opportunities in the field of CBDCs
For new age Professionals or Seasoned Professionals like Chartered Accountants, Cost and Management Accountants, Accounting Personnel and associated professionals, it will open new avenues of opportunities in accounting, documentation, auditing, verification, revenue assessments, systems developments and implementations, review monitoring, disclosure reporting and so on.
Whenever pathbreaking new technology initiatives are introduced, it always opens new vistas of opportunities for all if one is smart enough to contemplate, visualise and explore. It will require a proactive approach by Professionals to accept, adapt and implement such changes in the new mechanism of transacting economic activities.
With advent of CBDCs, I can foresee major architectural changes being introduced in systems documentation, disclosure and reporting, audit and attestation reporting, regulatory aspects, system customisation, development and implementation and so on. The scope of such services will extend beyond the borders of India to international economies depending upon the one's canvas for providing the rangeof professional services.
In my personal view, the CBDC development is a positive one in the interest of all professionals. We must actively and determinedly work towards implementing such change in our own lives as well as in our economic or social activities to shift from an informal way to a formal way of working.
Future Developments and the Way Forward
With the introduction of CBDCs, we can envisage the following future developments and a modified eco system:
- Future demonetisation of physical currency in a gradual manner;
- Widening scope of Disclosure, Compliance, Monitoring and Reporting of data and information under Income Tax, GST, Corporate Law, Tax Audit and other economic laws applicable to business enterprises, thereby resulting in more opportunities for the professionals in general;
- Major changes in revamping of existing laws to provide for smooth, effective and seamless transition by offering incentives to adapt to the CBDCsnew regime;
- Increase in existing Tax Audit Limits as specified under Section 44AB of the Income Tax Act 1961;
- Increased security measures from 2 factor authentication to 3 factor or more;
- Establishment of dynamic and resilient infrastructure systems;
- Technology advancements in the field of IOTs, Broadband, Digital Apps and Software etc;
- Revamping of Banking segment, Data Protection Laws & Indian Evidence Act;
- Widening of Taxpayers base by converting the informal economy into formal economy by improving tax ecosystem of the economy;
- Minimum Tax Evasion;
- Minimum money laundering activities and/or nefarious, criminal and anti-social activities;
- Increased GDP of the economy and so on.
In retrospect, when I look back at the changes introduced gradually one by one - providing incentives to small scale business units by providing minimum prescribed percentage profit of 6% as against 8% provided u/s 44AD, further Tax Audit Limits increased from 1 crore to 5 crore and then 10 crores with certain terms and stipulations, plus reporting of transactions of borrowing providing the means of such receipts, plus mandatory facilities to be provided for the electronic means of payments for certain class of taxpayers under Income Tax Laws and mandatory e-invoicing limits getting reduced again and again - it reinforces my views that the Government had planned and provided for the implementation of CBDCs in a strategic, sequential and deliberate manner over well laid down timelines.
(Note: Views expressed are my personal views and they may not be accepted by the Government. All readers are requested to take their considered views based on their own study and research to reach any suitable conclusions. There can be many other situations under the law/s but I have tried to establish the seed of thought by way of this article in the minds of readers. Suggestions to improve the article is always welcome with folded hands).
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