Governments across the world are working on digital currencies but the pace has got accelerated after the war in Ukraine and the imposition of sanctions by the US and its European allies against Vladimir Putin’s Russia.

India’s compulsion has been led by the invasion of cryptocurrencies and has nothing to do with what is happening in Ukraine. While presenting the budget on 1 February, Union finance minister Nirmala Sitharaman said the digital rupee will be issued by the Reserve Bank of India (RBI) in 2022-23 using blockchain technology.

 The policymakers in the US, on the other hand, are paying attention to the initiatives taken by China to push the digital yuan. President Joe Biden has ordered the US agencies to chart a strategy for virtual assets, including launching a digital dollar backed by the Federal Reserve.

China has been rolling out the digital yuan in more cities ever since the e-CNY was soft-launched at the 2022 Beijing Olympics. More than 123 million wallets facilitate payments equivalent to nearly $9 billion, as per the director-general of the Digital Currency Institute at the People’s Bank of China.

In the Eastern Caribbean, DCash is available on seven islands. The banks use multifactor authentication to access a private blockchain to process encrypted payments data for DCash.

Qatar is the latest in embracing efforts to launch a central bank digital currency (CBDC). According to the International Monetary Fund (IMF), 76% of central Arab banks are interested in introducing digital currencies. At least two Gulf countries will launch digital currencies in the next three years. 

A group of central banks, including the Reserve Bank of Australia (RBA), has completed a trial using a shared platform to meet international settlements using multiple central bank digital currencies. The project involves the Bank for International Settlements Innovation Hub, Bank Negara Malaysia, Singapore, the South African Reserve Bank, and the RBA. As per initial results, the CBDCs are issued by participating central banks for direct transactions with each other on a shared platform. The project demonstrated the technical viability of shared multi-CBDC platforms for international settlements. 

More than 90 financial regulators across the globe are busy carving out a CBDC. Still, despite a flurry of activity, finance experts have been divided on the benefits of a digital currency, with most regulators indicating reasons for caution. 

The urgency to go digital follows the courageous decision of the US and the European Union to use the dollar as a weapon of war. It has been effectively used as a tool for the economy so far. Even as the geopolitical compulsions change in the midst of Russia’s attack on Ukraine, sovereigns are worried about the future of their savings lying lazily in the vaults of the US banks. The dependence on oil and commodities like gold sold solely in USD requires another internationally acclaimed currency. The US dollar has been playing this role for the last five decades. But the overnight seizure of the reserves in the greenbacks of warring nations has shattered its universal trust. The search for an alternate currency has commenced with a ferocity of efforts worldwide. 

Indian innovators of the CBDC articulate that the digital rupee will be part of the narrow money (existing physical currency) and not the amount of the broad money (bank money or deposits ). Broad money is created when the bank gives out loans. CBDC will be part of narrow money, similar to the existing currency. As no interest is earned on the cash today, CBDC holdings and accumulations will not make any interest after launch.

In Australia, the regulator currently issues two forms of money: physical money in banknotes; and digital cash in the form of balances held in accounts in commercial banks to settle payment obligations between each other.

CBDC is new digital money designed for retail use, like a digital version of banknotes; or wholesale use by a limited group of market participants for wholesale payments and settlements. 

Unlike domestic payments, where banks can pay each other directly on a single national payments platform, there is currently no single international platform for cross-border payments and settlements. Now, the correspondent banking model is used, where banks hold foreign currency accounts with each other. The present model is fragmented, slow, opaque and expensive compared with domestic payments.

The focus is urgently installing a platform for cross-border interbank payments to substitute the USD as an international currency. On such a platform, each participating central bank issues its own CBDC. Commercial banks can then hold these CBDCs directly, gaining access to foreign currencies without the need for accounts with correspondent banks. 

Given the vigorous efforts made by the regulators across the world, a suitable platform may soon emerge. It would comply with regulations like foreign exchange controls, anti-money laundering measures, and know-your-customer rules, and the CBDC will become an alternate global trade currency. 

Efficient, impartial, faster, cheaper, transparent and inclusive cross-border payments could benefit citizens and economies. The fears of overnight appropriation of reserves will also mitigate to usher in harmonious long term planned economic development. Maybe the war in Ukraine will create a new economic order and re-orient the payment mechanism by accelerating the introduction of non-pliable digital currencies.