Learning Objectives:

  • Understand blockchain technology and its applications in banking.

  • Explain Central Bank Digital Currencies (CBDCs) and their role.

  • Describe Decentralized Finance (DeFi) and its opportunities.

5.1 Blockchain Technology in Banking
Blockchain is a distributed ledger technology that enables secure, transparent, and immutable record-keeping without a central authority . Applications in banking include:

  • Smart Contracts: Self-executing contracts with terms written into code .

  • Trade Finance: Streamlining documentation and reducing fraud in international trade .

  • Cross-Border Payments: Enabling faster, cheaper, and more transparent cross-border transactions .

5.2 Central Bank Digital Currencies (CBDCs)
CBDCs are digital forms of fiat currency issued by central banks . They are distinct from cryptocurrencies as they are centralised and backed by the state . Key features:

  • Digital Rupee (e₹): India’s CBDC pilot, implemented in wholesale and retail phases .

  • Function: CBDCs aim to reduce the cost of cash management, enhance payment efficiency, and provide a digital alternative to physical currency .

  • Regulatory Framework: RBI’s stance on CBDCs emphasises privacy, security, and financial stability .

5.3 Cryptocurrency and Decentralized Finance (DeFi)
Cryptocurrencies (e.g., Bitcoin, Ethereum) are digital or virtual currencies that use cryptography for security and operate on decentralised networks . Decentralized Finance (DeFi) refers to financial services built on blockchain networks, eliminating intermediaries like banks and brokerages . DeFi applications include:

  • Decentralized Exchanges (DEXs): Trading without a central authority .

  • Lending and Borrowing Protocols: Interest-bearing accounts and collateralised loans .

  • Yield Farming: Earning rewards by providing liquidity .

 
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