By: Himanshu Mishra*
INTRODUCTION
The EHI Retail Institute report, which shows how cash payments have decreased by 5.6% to 40.9% and how digital payments have increased, is used in the article to establish the scene. It also predicts how the Central Bank Digital Currency (CBDC) will accelerate this shift.
Act 2: Efficiency Unveiled: The Promise of CBDC emphasises the usefulness of CBDC in contemporary financial ecosystems and discusses the factors that affect the supply of CBDC and its consequences.
Act 3: CBDC in Comparison: Stablecoins and Traditional Systems follows a comparison of CBDC with stable coins and conventional payment methods, and the benefits of CBDC for financial inclusion and social welfare are examined.
Act 4: Smart Contracts A catalyst in CBDC dynamics comes next : Examining the advantages and effectiveness of smart contracts. The use of smart contracts in the CBDC, suggests the use of smart contracts to replace the current legal structures.
Act 5: The CBDC’s Final Act: Increasing India’s Resilience , The moving line “There is a special providence in the fall of a sparrow” is a statement from Hamlet that ends. Illustrating how CBDC threatens the monopoly of the USA’s SWIFT Network and strengthens India against China’s e-yuan , stating that CBDC is an important partner in the Asia-Pacific area. Symbolizing the demise of traditional money and the collapse of the cash payment economy, which is being replaced by the revolutionary CBDC.
In telling the story of India’s financial transformation, this article follows the steps that led to the demise of paper money, the emergence of digital payments, and the significant influence of CBDC. A timeless quotation concludes the last act, highlighting the providence of change and presenting CBDC as the dawn of a new age for the Asian Pacific financial environment as a whole, not just for India.
ACT 1: DECLINE OF PAPER CURRENCY AND RISE OF DIGITAL PAYMENTS
“To be or not to be, that is the question.”
– Hamlet
The world of electronic money and payments has undergone an unprecedented wave of technological advancement in recent years, and this trend is projected to persist. Innovations, notably distributed ledger technology (DLT), portable computing, and cryptocurrencies, have attracted the fascination of financial intermediaries, central banks, and consumers in general. Like Hamlet pondering the existential question, central banks are left unsure if these technological changes provide opportunities for boosting their efficacy or risks to their established operations. They have trouble determining how to respond to these changes, such as whether to enact new laws or issue an independent cryptocurrency of their own.
A study by the EHI Retail Institute found that in 2020, the percentage of retail purchases made with cash decreased to 40.9 from 5.6, while sales made with cards increased by 5.8 to 56.3 percentage points. Globally speaking, cash plays have long ago taken on a secondary position and are progressively being supplanted by electronic or digital equivalents. Other electronic or digital payment methods, particularly the payment services Google Pay, Amazon Pay, PayTM, and Phonel’e, are dispensing with the “cash culture” in India in addition to internet transfers, debit, and credit card payments. Alternatives to cash have emerged as the primary method of payment for individual customers in several nations. In the eyes of the times, cryptocurrencies International trade and commercial partners depend on In the eyes of the times, international trade and business partners depend on quick, cross-currency money transfers. Digital procedures have long since been a part of traditional payment systems based on central bank currencies. However, these don’t seem to be sufficient to fulfil the demands of digital economic activity anymore, which means that new digital payment methods might appear to suit market demands. With the help of cryptocurrencies, participants are now able to handle financial transactions profitably, outside the influence of international and national financial market regulations, and without the help of banks or payment service providers.
Issues Raised: 1) Will the central bank’s present payment systems operate more efficiently as a result of the CBDCs?
2) Would an interest-bearing, publicly available CBDC increase the efficiency of the current payment methods?
3) Would the implementation of CBDC result in an increase in social welfare?
4) How might smart contracts take the place of conventional payment contracts? What are the advantages and difficulties of this change?
5) How does CBDC stack up against other well-known cryptocurrencies and current stablecoins?
ACT 2: EFFICIENCY UNVIELED: THE PROMISE OF CBDC
“What a piece of work is man”
-Hamlet
When considering the complexities of technical developments in payments, one may consider mankind in a manner similar to that of Hamlet. Even if the central bank operated a wholesale payment system based on this technology, research on Project Jasper (Phase 1) found that the system would not be as efficient as the ones in place now. Secondly, one may argue that the Bitcoin technology can be used to construct an anonymous, instantaneous digital currency substitute. As previously said, this decentralised system necessitates network verification and communication, which makes the process time-consuming. As a result, transactions won’t be instantly final. Policymakers must make a trade-off because of this. Given the status of technology today, either the system has to give up some anonymity, in which case there are a lot of other design possibilities, or it has to give up the instantaneous finality of transactions.
Thus far, it has been determined that the current state of technology does not support the use of a decentralised verification method, regardless of whether the issuer is a central bank. What would happen if e-money was issued by the central bank utilizing centralized verification technology? Would this electronic money increase payment efficiency?
It is not unexpected that the issuer, which is welfare-maximizing by definition, may encourage efficiency while issuing this kind of e-money. The rationale is that, in comparison to conventional currency, this type of e-money offers the central bank a wider range of policy instruments. For instance, the issuer has authority over (tax or subsidise) charges for users’ transfers and users access to the system. These agreements are frequently utilised in digital payment systems like credit and debit, but they cannot be made with cash. However, in order to execute such welfare-improving plans, this kind of arrangement requires the central bank to gather a lot of (perhaps private) information on balances and transactions, which the central bank may not wish to undertake for moral or legal reasons. Once more, this poses a trade-off for decision-makers: more information used equals more efficiency.
ACT 3: CBDC IN COMPARISION: STABLECOINS AND TRADITIONAL SYSTEMS
“When the wind is southerly, I know a hawk from a handsaw.”
-Hamlet
In the intricate dance of digital currencies, Central Bank Digital Currency (CBDC) emerges as a central figure, and, much like Hamlet discerning the direction of the wind, the discerning eye seeks to understand its position in relation to other cryptocurrencies and stablecoins. Compared to the decentralised nature of cryptocurrencies like Bitcoin, CBDC is a digital representation of a country’s fiat money. While cryptocurrencies use decentralized networks and blockchain technology for verification, CBDC is controlled and supported by the stability and power of a country’s central bank.
In contrast, due to its peg to the value of the national currency, CBDC has a clear benefit in terms of stability. Cryptocurrencies, on the other hand, are notorious for their volatility, which is driven by market emotion and speculation.
CBDC and stablecoins are similar in that they both aim to reduce price volatility by tying their value to external assets or fiat currencies. The crucial difference, though, is who issues them: CBDC is a direct liability of the central bank, providing an unmatched degree of security and confidence, whereas stablecoins can be issued by private businesses. (Bernhart, S., Applications of CBDCs and private stablecoins: Comparative analysis.)
In recent decades, central banks have focused on interest rates rather than monetary aggregates. As a result, the supply of any central bank-issued money, including e-money, should be determined in such a way that the desired interest rate falls within the interest rate corridor. However, how would monetary policy be implemented differently if a central bank issued different types of money, such as reserves and a new type of e-money? The central bank can, in theory, maintain a flexible exchange rate between various forms of central-bank-issued money. However, the central bank’s flexible exchange rate policy practically means that it prints many denominations. This policy is unlikely to be implemented. The most likely possibility is that the central bank would preserve the current framework for enacting monetary policy. (That is, pricing short-term government bonds in terms of native currency.). As a result, all types of central-bank-issued money would be denominated in domestic currency, and the exchange rate would be equal. Because the demand reasons for these various forms of central-bank-issued money differ, the central bank would need to monitor their demand and always be ready to keep the exchange rate between them at par. Current practises include central banks monitoring demand variables for cash in order to meet demand, and this practise does not impede the central bank’s power to enact monetary policy.
Essentially, knowing the difference between CBDC and other cryptocurrencies or stablecoins becomes critical when the financial winds blow and stability is needed most. The Hamlet quotation alludes to a perceptive eye that is based on the direction of the wind, similar to the perceptive assessment required to differentiate the hawk (CBDC) from the handsaw (other digital currencies). The quotation highlights the necessity of having a thorough awareness of the current circumstances in order to make wise decisions in the field of digital currencies in an ever-changing financial environment.
ACT 4: SMART CONTRACTS: A CATALYST IN CBSDC DYNAMICS
“O, throw away the worse part of it, and live the purer with the other half.”
– Hamlet
The term “smart contracts” was invented in the early 1990s by cryptographer Nick Szabo. Szabo defined a contract as a series of commitments reached through a meeting of minds. He correctly observed that computers enable the execution of algorithms. The contract terms are first converted into code, which is a collection of if-then functions. When a condition is met, the smart contract will proceed to the next phase of the contract’s execution. Thus, the term “smart contracts” refers to computer transaction protocols that automatically execute contract terms based on a set of criteria.
Although the concept of smart contracts has been around for a while, a real-world application has only recently become conceivable due to technological advancements in blockchain technology. Blockchain is a decentralised digital ledger in which transactions are chronologically and publicly recorded. In its early phases, blockchain was the method for tracking cryptocurrencies like Bitcoin. However, as technology progressed, new variants, such as private, permissioned, and consortium blockchains, emerged. Finally, blockchain technology has the potential to simplify a wide range of corporate transactions.
Historically, we have relied on established organisations such as banks and the government to authenticate transactions—to ensure that the individuals with whom we are trading are who they say they are. Institutions serve as go-betweens, fostering confidence between two parties engaged in business. These institutions, however, are not without flaws. They have occasionally become victims of foul play by external or internal actors. In fact, consolidating trust in one organisation can be harmful since it creates a single point of failure.
Within the confines of Indian legal frameworks like the Indian Contract Act, 1872, smart contracts have the potential to revolutionise traditional payment contracts. The self-governing characteristics of smart contracts, in which parties encode the terms of their agreement into computer code, are consistent with the Indian Contract Act’s emphasis on the idea of freedom of contract. This technology development has the potential to automate the Act’s essential concerns and legal criteria. Section 25 of the Indian Contract Act requires an agreement to be supported by lawful consideration. Smart contracts, when coded correctly, can ensure this legal requirement. Additionally, the Information Technology Act of 2000—which recognized the legitimacy of electronic transactions—and the incorporation of smart contracts are compatible, as demonstrated by the ruling in Trimex International Fze Ltd. v. Vedanta Aluminium Ltd. The majority of these exchanges and interactions necessitate that individuals possess two different kinds of resilience: The first is the assurance that crucial communications at pivotal moments in an interaction and all crucial components of a transaction have the same meaning for every participant are understood by each and every one of them. The second necessary level of certainty is knowing if and under what conditions there has been agreement between parties to an interaction or transaction. It is worthwhile to take each one in turn. It is easy to take the need for meaning clarity for granted since it is so basic and natural. There are unofficial and/or formal formats for every kind of social, political, legal, economic, and technological engagement or transaction. Participants frequently lack complete awareness of these protocols or how they operate, but this does not lessen their crucial significance in the slightest. As we build digital twins of current interactions or transactions, or even completely new ones, we must either re-engineer these protocols or start from scratch.It is obvious at an intuitive level that two parties to a contentious transaction may have precisely agreed upon the meaning of each and every detail of the transaction. It’s possible that both parties have unambiguous digital proof that they both understood exactly what was meant to be said in every detail of the transaction. However, even in that scenario, more proof is needed to determine that they both meant They did, in fact, come to an agreement about the transaction in issue; in other words, an agreement is a procedure that isn’t connected to the interpretation of a particular transaction or exchange of messages.However, it is not an easy task to create a digital twin of the protocols that are now utilized in human interactions. For many years, individuals have recorded, sent, or otherwise processed contracts and other agreements they have made using computers. Computers have lately begun to be used, under certain very controlled conditions and with appropriate procedures and structures, to make agreements on behalf of the trade partners in scenarios like electronic trading between highly trusted parties. Here is an example of a straightforward Solidity contract:-
pragma solidity *0.4.0;
contract SimpleStorage {
uint storedData;
function set(uint x) {
storeData=x;
}
function get() constant returns (uint) {
return storedData;
}
}
Furthermore, smart contracts expedite payment procedures in accordance with the Payment and Settlement Systems Act 2007, which gives the Reserve Bank of India authority to oversee and control payment systems in accordance with Section 4A. In line with the revolutionary potential of smart contracts, the Hamlet statement, “O, throw away the worse of it, and live the purer with the other half,” exhorts the legal system to do away with inefficiencies and adopt the purer, more effective method that smart contracts provide. Smart contracts are a step towards an automated, transparent, and simplified future for payment contracts in India within this changing landscape.
ACT 5: THE CBDC’S FINAL ACT: INCREASING INDIA’S RESILIENCE
“There is a special providence in the fall of a sparrow.”
-Hamlet
Against China’s e-yuan and the USA’s SWIFT network, in particular, India’s Central Bank Digital Currency (CBDC) has the ability to strategically establish itself as a major force in the international financial sphere. One of the main players in international transactions, SWIFT, has problems with excessive fees, short working hours, and delays. A more effective and smooth substitute that enables real-time cross-border transactions at a reduced cost is India’s CBDC. SWIFT’s established paradigm may be challenged by the decentralized structure and round-the-clock accessibility of the CBDC.
Adoption of it might improve India’s relations with its neighbors and position the CBDC as a major role in the changing financial scene.
A key instrument in limiting the impact of China’s e-yuan is India’s CBDC. Asia-Pacific states may look for alternatives as geopolitical tensions increase. The stability of the Reserve Bank of India supports the CBDC, which may provide a dependable and safe alternative while drawing attention away from China’s digital currency.
Greater trade facilitation in the Asia-Pacific region is made possible by CBDC. By adopting it, India may become a pioneer in promoting financial cooperation and lessen reliance on conventional banking systems while offering a more direct, safe, and affordable conduit for regional commerce.
India is indicating the demise of conventional currency and the antiquated cash payment system by adopting CBDC. The inventive virtual currency showcases India’s dedication to technological progress, rendering it a desirable collaborator for other countries seeking to update their monetary frameworks.
The quote, “There is a special providence in the fall of a sparrow,” implies that seemingly inconsequential events can have profound consequences. In the context of India’s CBDC, its rise to prominence signifies a transformative force in the financial world. Just as a small sparrow can have an outsized impact, India’s CBDC can play a pivotal role in reshaping regional financial dynamics, defeating SWIFT and e-yuan, and emerging as a strong partner in the Asia-Pacific region.
*Himanshu Mishra is a law undergraduate at faculty of law, Jamia Milia Islamia. The author may be contacted via mail at himanshu2303623@st.jmi.ac.in.
Kautilya Society, RMLNLU 
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