What Does the Future Hold for Currencies in Nepal as a Less-Cash Society Emerges?

The use of primitive bank notes relative to digital payment has indeed been declining consistently for the past three to five years, and similar trends will be evident in coming years as well. It has led some observers to project a “Less-Cash society” soon. So, it will be high time to think about the digital currency instead of printing physical notes and coins to preserve the central bank’s seigniorage revenue.

Recently, it has been observed that central banks of various countries like China, India, Sweden or South Africa, and even the European Union have been experimenting with their own form of digital currencies to counter the severe effect of decentralized and unregulated cryptocurrencies like bitcoin. As the central bank cannot control its demand and supply, the lawful or unlawful use of crypto threatens the sovereignty of its own national currency. Hence, it is imperative to put forth efforts for the state-owned issued Central Bank Digital Currency (CBDC).

CBDC is a digitalized version of domestic currencies that is equal to physical cash that every individual and corporate use or the reserves that banks hold at the central bank - Nepal Rastra Bank (NRB).

These days, if we are banking with any bank or a financial institution regulated by Nepal Rastra Bank, we could experience that our money is already in digital form. The use of digital wallets, payment apps, bank to bank fund transfers, use of debit, prepaid, and credit cards are a few lively examples. So, it is observed that the newer generation even in Nepal rarely uses physical cash for their day-to-day payments, settlements, or purchases. These online payments /transfers are possible as the settlement takes place between the accounts of customers in the respective banks whose accounts are centrally maintained in the central bank.

CBDCs, however, are the direct liability of the central bank and are token-based where these tokens would be represented on a block chain or distributed ledger established by the central bank. Unlike public block chains like Bitcoin and Ethereum where the info recorded is available to all, these are private or highly regulated block chains which only the central bank or authorized parties can have access.

Theoretically, there are two types of CBDC’s: Wholesale CBDCs and Retail CBDCs,

If the transaction takes place between the central bank and commercial banks or the entities that are licensed by the central bank holding accounts with the central bank, it is called wholesale CBDCs. These are more to do with the infrastructure and plumbing of the financial system and do not affect the individual/general public directly.

However, if digital currencies can be used by businesses as well as general people like us, it is termed Retail CBDCs. In a simple sense, it’s like the currency that is in our mobile wallet issued directly by the central bank. In developing countries like Nepal, where so many people are supposed to be unbanked and underbanked, Retail CBDCs could make a strong case for financial inclusion because a central bank directly can transfer funds to the unbanked as long as they have a mobile phone. Just think of distributing senior citizen allowance, widower allowance, Covid-19 relief package, or any natural disaster relief fund by the government via central bank in the form of digital currency directly to the right beneficiary at right time with few clicks without using the long, traditional and expensive chain of distribution.

Having said that, the practical use of Retail CBDCs could expose a few risks and losses as well. If the general public could all hold the money with the central bank why do they need to hold the money in a neighboring branch of the bank or financial institution?

So, the central bank should exercise to have the mix of these two as it is never incorporated to deal with millions of retail customers. The approach is most likely to be two-tiered – issue the CBDCs to the banks, thereafter banks issuing to retail customers. This could allow the authorities sufficient room to experiment with this new financial tool without disrupting the entire banking ecosystem.

 Reference: Numerous articles and videos related to Digital Currencies

Rabindra Shahi

Chartered Accountant