Context: Recently, Nigeria launched its non-interest-yielding central bank digital currency (CBDC) — the eNaira.
Background

• Along the similar lines, CBDC pilot projects are underway in at least 17 other countries. The primary drivers for central banks of EMDEs (emerging market and developing economies) to study CBDCs are domestic payments efficiency, financial inclusion, and payments safety.
• In this context, it should be noted that CBDC’s design and implementation should be as per the domestic priorities.

What are the ways in which CBDCs can be designed?
A particular CBDC could be designed in the following ways:

• Account-based or tokenised
• Distributed directly by the central bank or through intermediaries
• Interest-bearing CBDC’s
• Can be programmed to offer limited pseudonymity (the state of using or being published under a pseudonym) to its holders

How is eNaira designed to achieve the intended benefits?

• Unique identification of beneficiaries and has been designed as an account-based CBDC with know your customer (KYC) norms linked to the unique identity indicators under Nigeria’s National Financial Inclusion Strategy.
• Eliminating the need for intermediaries and enables targeted welfare payments into the wallets of citizens directly.
• Increases the efficiency of the Payment system

 Issues with introduction of a CBDC by the RBI

• Threat to the banking system: Adopting an interest-bearing Indian CBDC could pose an existential threat to the banking system by eroding its critical role as intermediaries in the economy according to Former RBI Governor D Subbarao.
• If CBDCs compete with bank deposits and facilitate a reduction of bank-held deposits, banks stand to lose out on an important and stable source of funding.
• Banks may respond by increasing deposit rates, but this would result in higher lending rates and decreased lending activities. Also, banks may be incentivized to engage in riskier lending and hold relatively risker, less-liquid assets. This could have long-term effects on financial stability.
• The introduction of CBDCs would require central banks to maintain much larger balance sheets, even in non-crisis times. They would need to replace the lost funding by lending potentially huge sums to financial institutions, while purchasing correspondingly huge amounts of government and possibly private securities.

CBDCs could also have implications for the state from seigniorage (profit made by a government by issuing currency) as the cost of printing, storing, transporting and distributing currency can be reduced.