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Central Bank Digital Currency: India's central bank digital currency makes glitch-free start in the world of real-time trades

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India’s central bank digital currency (CBDC) made a steady and glitch-free start in the world of real-time trades Tuesday, with several banks using the virtual money backed by Mint Road to settle nearly 50 government bond transactions cumulatively worth about Rs 275 crore .

State Bank of India (SBI), Bank of Baroda, ICICI Bank and IDFC Bank are among the nine participating lenders that are said to have cut the inaugural CBDC deals for settlement of trades in g-secs, three people familiar with the matter told ET . Nine lenders, including HDFC Bank, HSBC and Kotak Mahindra and Yes Bank, are participating in the central bank pilot project that began Tuesday. Each bank is said to have made at least four-five deals.

Individual banks could not be contacted immediately for comments.

“The pilot project has got encouraging responses across participants,” said Sushanta Mohanty, general manager, Bank of Baroda. “We participated through an inaugural deal. This digital currency should gain more traction.”

Each bank participating has a digital currency account, known as CBDC Account, which is maintained with the Reserve Bank of India (RBI). Banks will have to first transfer money to this account from their respective current accounts.

If bank X is buying bonds from bank Y, the CBDC account of X will be debited, with a corresponding credit in the same account of bank Y.

Unlike the existing settlement process where banks settle trades on a net basis on a dedicated platform known as NDS-OM, the CBDC pilot project requires every trade to be settled, billed on a ‘gross basis’.

Digital settlement will happen within the trading day – that is T+0 – unlike T+1 in general government securities trades.

For now, the balance in CBDC for a bank will again be sent to its current account.

“The RBI may expand use cases for CBDC in other wholesale transactions if the pilot project becomes successful,” said a trader from a participating bank.

Cross-border and institution-to-institution payments may be some of the potential pockets of future usage.

Currently, cryptography technology is being used for pilot projects, which will evolve over a period of time, sources said. Cryptography is a secured mode of communication.

“Blockchain could well play a crucial role in CBDC, mitigating chances of fraud,” said Ram Rastogi, chairman, the Fintech Association of Consumer (FACE). “Wholesale transactions are primarily account based. Retail transactions would be token based, with a smaller denomination when it starts.”

A retail pilot project with CBDC is expected to be launched at a later stage.

The real danger in CBDCs, according to Rastogi, is that there is no limit to the level of control the government could exert over people if money is purely electronic and provided directly by the government.

All such nine banks are engaging with the RBI frequently to figure out technical glitch that may appear. CBDC accounting process, transactional smoothness, accurate debit/credit entries are billed as key to the digital currency’s success via this pilot project.