Nepal Rastra Bank’s prototype for digital currency ‘CBDC’ signals shift towards a cashless economy

KATHMANDU: In a significant move towards embracing digital transformation, Nepal Rastra Bank (NRB) has developed a prototype for its own Central Bank Digital Currency (CBDC). This prototype marks a crucial step in Nepal’s journey toward modernizing its financial infrastructure and adapting to the global trend of digital currencies.

With the increasing popularity and adoption of cryptocurrencies and digital currencies worldwide, NRB’s initiative comes at a pivotal time when nations are exploring and implementing their versions of digital currencies to stay ahead in the rapidly evolving financial landscape.

Nepal Rastra Bank’s Vision for CBDC

The concept of a Central Bank Digital Currency (CBDC) is not new, but its implementation in Nepal signifies a landmark moment for the country. NRB has made significant strides in the development of its CBDC, focusing on creating a secure, efficient, and inclusive financial ecosystem. The prototype, which has been developed as version 0.1, is designed to cater to both wholesale and retail users, indicating its broad application across different sectors of the economy.

Krishna Ram Dhunju, the head of the CBDC department at NRB, stated that the prototype is built on the Hyperledger Fabric platform, a blockchain-based infrastructure known for its robust security features. “We have developed the base prototype version 0.1, which can be used for both wholesale and retail types of CBDC,” Dhunju said. He further emphasized that while the prototype is ready, certain aspects, such as the cap on the amount of money that can be stored in the CBDC wallet, are yet to be finalized.

Global Context: The Rise of Digital Currencies

Globally, the rise of cryptocurrencies like Bitcoin, Ethereum, and others has prompted central banks to consider digital currencies. Unlike decentralized cryptocurrencies, which are not regulated by any central authority, CBDCs are government-issued digital currencies that aim to provide a stable and secure alternative to traditional cash and private cryptocurrencies.

Countries like China, Sweden, and India are at the forefront of this movement, with China’s digital yuan and India’s e-Rupi being notable examples of successful CBDC initiatives.

In this global context, Nepal’s development of a CBDC is a strategic move that aligns with the broader international trend. As digital currencies continue to gain traction worldwide, NRB’s initiative positions Nepal as a forward-thinking nation ready to embrace the benefits of digital finance while mitigating the risks associated with cryptocurrencies.

CBDC’s Impact on Nepal’s Financial System

The introduction of a CBDC in Nepal is expected to have a profound impact on the country’s financial system. One of the primary objectives of the CBDC is to enhance financial inclusion by providing a secure and accessible means of digital payment for all citizens, including those in remote and underserved areas.

This digital currency will enable seamless transactions across the country, reducing the reliance on physical cash and minimizing the costs associated with cash handling and distribution.

Moreover, the CBDC is designed to be compatible with existing digital payment systems, ensuring a smooth transition for users. However, as NRB moves forward with the implementation of the CBDC, there are several challenges that need to be addressed, particularly in terms of cybersecurity and the potential disruption of current financial service providers.

Challenges and Concerns

While the development of a CBDC brings numerous benefits, it also raises significant challenges and concerns. One of the most pressing issues is cybersecurity. As the financial system becomes increasingly digitized, the risk of cyber attacks and fraud also increases.

During a discussion on the CBDC, Ashok Sherchan, CEO of Prabhu Bank, highlighted the need for robust cybersecurity measures to protect the CBDC system from potential threats. “We need to be clear on how to manage financial losses that could occur when the system is disrupted or when users do not know how to operate it,” Sherchan stated.

Additionally, there are concerns about the impact of the CBDC on existing financial service providers, particularly digital payment platforms and wallet companies. Nileshman Singh Pradhan, CEO of Nepal Clearing House, raised questions about the future role of these providers once the CBDC is implemented.

He emphasized the importance of collaboration between NRB and the private sector to ensure a smooth transition. “If you could clarify this, we could adjust our infrastructure accordingly by the time CBDC is introduced in two years,” Pradhan said.

Lessons from Global CBDC Initiatives

Nepal’s journey towards implementing a CBDC can benefit from the experiences of other countries that have already launched or are in the process of developing their digital currencies. For instance, China’s digital yuan has undergone extensive testing, focusing on usability, security, and interoperability with existing payment systems.

Similarly, Sweden’s e-krona project has provided valuable insights into how a digital currency can coexist with traditional banking systems while enhancing financial inclusion.

India’s e-Rupi, which was launched as a digital voucher system, offers a different perspective by demonstrating how digital currencies can be used for targeted financial support and government welfare programs. The lessons learned from these initiatives can guide NRB in addressing potential challenges and ensuring the successful implementation of its CBDC.

The Role of Blockchain and Fintech

Blockchain technology plays a central role in the development of CBDCs, providing the underlying infrastructure that ensures security, transparency, and efficiency. The use of blockchain in NRB’s CBDC prototype aligns with global best practices, where central banks are leveraging this technology to build resilient digital currencies.

Furthermore, the rise of fintech companies has been instrumental in driving the adoption of digital payments and cryptocurrencies. In Nepal, fintech startups have already made significant strides in promoting digital finance, and their involvement in the CBDC initiative could accelerate its adoption.

However, this also raises questions about the role of existing fintech companies once the CBDC is fully implemented. Will they complement the CBDC, or will they face challenges in adapting to this new digital currency landscape?

The Future of Digital Currency in Nepal

As Nepal Rastra Bank continues to refine and develop its CBDC, the future of digital currency in Nepal looks promising. The successful implementation of a CBDC could pave the way for a more efficient, inclusive, and secure financial system, positioning Nepal as a leader in digital finance in the region.

However, the road ahead is not without challenges. NRB will need to address cybersecurity concerns, ensure interoperability with existing payment systems, and foster collaboration with the private sector to achieve its goals. Additionally, public awareness and education will be crucial in promoting the adoption of the CBDC and building trust among users.

The development of a Central Bank Digital Currency by Nepal Rastra Bank is a significant milestone in the country’s digital transformation journey. As the world moves towards a cashless future, Nepal’s proactive approach in developing a secure and efficient CBDC positions it well for the challenges and opportunities that lie ahead. The coming years will be critical in determining the success of this initiative and its impact on Nepal’s financial landscape.