The Continuing Development of Digital Money

By Frank-Jürgen Richter

September 18, 2022

Every known product or service is getting enhanced by emerging technologies. Money is no different. There is a strong push among new-age thinkers and pioneers alike in rethinking money as we know it.

Fiat currencies are not being replaced by digital money just yet, but the competition is on from money that stays digital and is transacted completely online. The advent of technologies such as POS systems; digital banking; digital currencies; and high-bandwidth internet connectivity have pushed digitalization of money.

This push to digitalize also bodes well for the countless unbanked and underbanked individuals in developing regions such as Africa and Asia. Several innovations are on track to drive financial inclusion, and one of them is thee digitalization of money. But its success is only possible through greater acceptance among consumers and further development and regulation of it by governments.

This and many more topics will be discussed in the upcoming Horasis India Meeting, being held between 25 to 26 September, 2022 in Vietnam. The themes discussed in the meeting will center around geopolitics, impacts of COVID-19, and the pressures being faced by economies worldwide. The event will be attended by 300 of the most senior members of Horasis, who will suggest ways in which developing economies—particularly India and Vietnam—can realize a sustainable and resilient future.

What is Happening?

Countries around the world are exploring ways to introduce a central bank digital currency (CBDC) in their economies. Central banks around the world realize the growing need to provide virtual money, amid the growing popularity of cryptocurrencies and stablecoins.

The use and adoption of cryptocurrencies has shot up drastically amid the pandemic. The UN states that 7.3% of Indians owned assets in the form of digital currencies and ranks 7th in terms of digital currency ownership.

India’s Finance Minister Nirmala Sitharaman announced that its central bank (the RBI) will release its own CBDC by 2023, while presenting the Union Budget 2022. She said, “Introduction of Central Bank Digital Currency will give a big boost to digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. It is therefore proposed to introduce a digital Rupee using blockchain and other technologies to be issued by the Reserve Bank of India starting 2022-2023.”

Meanwhile, both the Philippines and Vietnam’s central banks are partnering together with Tokyo-based startup Soramitsu, to explore the feasibility of running CBDCs within their own economies. Cross-border CBDC acceptance can assist Vietnamese businesses in transacting with Chinese tourists and visitors using Vietnamese CBDC.

But why CBDC?

Many are raising questions as to the need of a CBDC when digital payments are already there. Use of UPI for making digital payments is rampant across countries such as India and Vietnam. So why is there a need for a CBDC?

CBDC will be equivalent to crypto assets like bitcoin and ethereum, but unlike being mined by private individuals, it will be wholly issued and controlled by a country’s central bank, just like present fiat currencies such as rupees in India and dong in Vietnam. It can also be used for making retail, wholesale and international payments.

T Rabi Shankar, Deputy Governor of the Reserve Bank of India, had this to say regarding CBDC: “It is conceivable for an Indian importer to pay its American exporter on a real time basis in digital dollars, without the need of an intermediary. This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement.”

Other than this, CBDC addresses a much bigger concern of financial inclusion. Many individuals residing in rural areas of India and Vietnam, still lack access to basic banking needs such as deposits, savings or withdrawals. This puts them at a bigger disadvantage while also impacting growth prospects of a country. Introduction of CBDC will allow such individuals to possess virtual money in their smartphones, without the need of a bank; while also getting access to digitalized financial services, such as online payment and receipts, and digital banking services.

Bottom Line

How much CBDCs will be able to leverage on this rush to digitalize, will depend on its efficiency and fulfillment of cross border payments. This will certainly pave the way for increased movement of foreign investments, further pushing the post-pandemic recovery.

To realize the benefits of CBDC, India and Vietnam will need to strengthen its cybersecurity – as virtual money will be vulnerable to cyberattacks. Additionally, governments will need to develop a strong regulatory framework that enhances data privacy, consumer protection and anti-money laundering standards to realize first-mover advantage in CBDC.

Introduction of every new thing requires a change in outlook and mindset of the people. Acceptance and awareness around the use and benefits that CBDCs can provide will need to be highlighted and worked upon, to truly exploit the many offerings of the digital economy.

Photo Caption: CBDCs are slowly becoming a topic of discussion across the world, with many governments thinking of experimenting with it