By Mihir Gandhi and Vivek Belgavi
CBDCs can be instruments that support government public policy objectives by providing a secure and resilient means of payment. They promote efficient, inclusive and innovative payments if they are properly controlled, and the risks involved are overcome by effective means.
Programmable payments (DBT): One possible use case of the CBDC is “fit-for-purpose” money used for social benefits and other targeted payments in a country. In such cases, the central bank may pay pre-programmed CBDCs to the intended beneficiaries, which could only be accepted for a specific purpose. For example, pre-programmed CBDCs could be issued for LPG subsidies as direct benefit transfer (DBT). This CBDC could only be accepted at authorized LPG agencies and would be refused for use in other areas. GPL agencies would be able to convert this CBDC into general purpose CBDC or fiat currency at any commercial bank, which would have the necessary authorization to change the nature of the CBDC.
These subsidies can also be extended to other sectors such as agriculture, where fertilizer subsidies could be transferred through the CBDC channel. This CBDC could only be accepted at authorized fertilizer outlets, thus ensuring minimal leakage in the subsidy program. Programmable payments can also be used by other organizations for employee expenses, including fuel and telecommunications bills. In addition, programmable payments can also be used in industrial supply chain ecosystems. In this case, the pre-programmed digital CBDCs could only be used for specific purposes such as fuel expenses and state border taxes.
Cross-border transfers: CBDCs could be used for faster cross-border payments. International collaboration among the world’s major economies, including India, could help create the infrastructure and arrangements necessary for the transfer and conversion of CBDCs. Such infrastructure must ensure interoperability of CBDCs between jurisdictions and rapid transfer of CBDCs to be successful. In such an environment, CBDC remittances could occur in real time, rapidly reducing the time required for 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 through the CBDC. In addition, the universal access attributes of a CBDC could also include offline payment functionality. Retail CBDCs distributed by RBI and commercial banks should be held in electronic wallets / accounts by end users. This would allow payment methods between the following:
• From consumer to consumer: where consumers could exchange CBDCs between their wallets
• Consumer to business: where consumers can use the CBDC to pay for products and services
• Business to Business: where businesses can exchange CBDCs between their business account portfolios
Because CBDCs offer instant settlement, they reduce the risk of clearing and settling retail payments, thereby reducing counterparty risk. The underlying technology of the CBDC, along with the digital nature of the currency, makes it superior to existing digital payments. Its irrefutable nature combined with transfers of property registration can provide irrefutable proof of proof of ownership.
MSME loans: Instant loans to micro, small and medium enterprises (MSMEs) in India may be possible with the help of the CBDC. As more and more MSMEs use the CBDC, banks can build a more accurate borrower risk profile. This can be used to respond quickly to the financing needs of MSMEs. In addition, stimulus measures for MSMEs can also be disbursed quickly by the central bank. This can help businesses grow and sustain themselves during times of uncertainty when availability of liquidity is limited. CBDC traceability can help MSMEs prove their creditworthiness. In addition, it leads to transparency and can be extremely resistant to counterfeiting.
Offline payments: Another possibility is offline payment which can be activated by the CBDC. The offline wallet in general would be a separate wallet and could be based on Near Field Communication (NFC) technology. The digital wallet / app can be used on NFC-enabled devices – a multifunction phone or a smartphone. In areas with weak networks or no internet, this will be a highly secure and easy solution for peer-to-peer payments. Identity verification, transaction confirmation and payment will be done through the offline wallet independently of the account without the need for an internet connection.
Extract from the PwC India report “Central Bank Digital Currency in the Indian context”, dated September 2021
The authors are respectively partner & leader (payment transformation) and partner & leader (fintech), PwC India